Quality of Earnings (QoE): What Every Business Owner Should Know Before Selling Their Company

When business owners begin thinking about an exit—whether next year or several years down the road—one of the most important tools in the sale process is often misunderstood: the Quality of Earnings (QoE) report. A QoE is more than a financial review. It is a deep analysis of whether a company’s earnings are accurate, consistent, and truly reflective of sustainable cash flow. 

While traditional audits verify compliance with accounting standards, a QoE report goes further by examining economic reality. A company may report strong profits yet still have low-quality earnings if those profits are driven by one-time events, irregular accounting, or revenue that is unlikely to continue. This distinction becomes essential during a sale or acquisition, where the buyer is assessing risk, value, and future performance.

Why Buyers Rely on QoE Reports

Most QoE reports are commissioned by buyers after signing a Letter of Intent (LOI), during financial due diligence. The goal is to validate whether the reported earnings are repeatable and sufficient to support the proposed purchase price and any associated debt. If earnings are overstated or inconsistent, the buyer may reduce the offer, or walk away entirely. 

A comprehensive QoE often runs 30–50 pages and includes:

• Background on the business
• Key findings
• Adjusted EBITDA calculations
• Analysis of revenue by customer
• Customer concentration risks
• Trends within individual business segments
• Working capital evaluation 

The depth of this analysis is what gives buyers confidence in their investment.

Why Sellers Should Consider a QoE Before Going to Market

Although the buyer typically pays for the QoE, savvy sellers increasingly order their own “sell-side” QoE early in the process. Doing so helps them:

• Uncover accounting issues before buyers find them
• Strengthen their valuation narrative
• Support add-backs that increase EBITDA
• Speed up deal timelines
• Avoid surprises during due diligence 

This preparation often results in smoother negotiations and higher transaction certainty.

What Goes Into a QoE Report?

To prepare the analysis, firms usually request:
• Monthly P&Ls (3–5 years)
• Balance sheets (3–5 years)
• AR and AP aging reports
• Revenue by customer and product line
• Details on non-recurring expenses
• Segment-level performance metrics 

This level of transparency helps analysts determine how dependable the earnings truly are. For example, if a company relies heavily on one customer for 40% of its revenue, that risk will materially impact the valuation.

Cost and Timeline

QoE reports vary widely in cost, typically ranging from $10,000 to $100,000, depending on the company’s size and complexity. They are performed by independent accounting or financial advisory firms specializing in transaction diligence. 

The Bottom Line

A Quality of Earnings report has become a standard expectation in modern M&A transactions. For sellers, it brings credibility, reduces deal friction, and increases the likelihood of achieving a premium valuation. For buyers, it provides essential insight into whether earnings are real, repeatable, and sustainable enough to justify the agreed price.

If you plan to sell your business or want to better understand your financial strength before entering the market, now is the right time to explore a QoE. Preparation directly improves outcomes, and the earlier you begin, the more control you retain throughout the transaction.

For support navigating valuation, preparation, and the sale process, contact:
D.Key@keypointtrustedadvisors.com | 713-899-5589 | Houston, TX