The Role of the Quality of Earnings (QoE) Report in Diligence

A Quality of Earnings (QoE) report analyzes a company’s financial performance to verify the accuracy and sustainability of its earnings. It’s not an audit — it’s a deep dive into how profits are made and whether they’ll continue under new ownership.

Buyers use a QoE to confirm they’re paying the right price.
Sellers can commission a “sell-side” QoE to strengthen credibility, anticipate issues, and keep control of the narrative during diligence.

A good QoE doesn’t just validate numbers — it builds confidence and accelerates closing.

The Report That Can Make or Break a Deal

When buyers dig into your business after signing an LOI, they want one thing above all else: certainty. They need to know that the profits you’re showing are real, repeatable, and sustainable.

That’s where the Quality of Earnings (QoE) report comes in.

Think of it as the deal world’s version of a home inspection. It’s not meant to embarrass you — it’s meant to give everyone a clear, detailed picture of what they’re buying. And just like a clean inspection can help a home sell faster, a solid QoE can give a buyer confidence to close.

At Sixty74, we see QoE reports as one of the most powerful (and misunderstood) tools in the diligence phase. Let’s demystify what they are, why they matter, and how sellers can use them to their advantage.

What Exactly Is a Quality of Earnings (QoE) Report?

A QoE report is a financial analysis that focuses on how your company actually earns money. It goes beyond the surface of your P&L to assess the quality, consistency, and reliability of your earnings.

Unlike an audit — which ensures compliance with accounting standards — a QoE evaluates the story behind the numbers.

A QoE typically includes:

• Adjusted EBITDA (earnings before interest, taxes, depreciation, amortization)

• Add-back verification (normalizing one-time or owner-related expenses)

• Revenue recognition policies

• Customer concentration analysis

• Working capital trends

• Seasonality and cyclicality

• Cash flow stability and debt coverage

QoE vs. Audit: What’s the Difference?

In short, an audit tells you if the numbers follow the rules.
A QoE tells you if the numbers can be trusted.

Why Buyers Order QoE Reports

Buyers don’t want surprises. A QoE helps them:

1. Validate valuation: Is the business really earning what the seller claims?

2. Identify adjustments: Are owner perks or one-time costs inflating or deflating earnings?

3. Understand trends: Are revenues stable or declining?

4. Assess risk: Are there accounting practices or customer dependencies that could threaten future earnings?

For buyers using bank or SBA financing, lenders often require a QoE before funding. It’s their way of confirming the business can cover debt service.

Why Sellers Should Consider a Sell-Side QoE

Buyers aren’t the only ones who benefit. In fact, the most prepared sellers commission their own QoE report before going to market.

Here’s why:

1. You Control the Narrative

A sell-side QoE lets you identify issues before the buyer does. If you know about inconsistencies, you can fix or explain them on your terms — not theirs.

2. You Speed Up Diligence

When a buyer sees a professional report from a reputable firm, it reduces friction and builds trust. Deals move faster because the buyer’s team spends less time re-verifying everything.

3. You Strengthen Your Valuation

A clean QoE supports your asking price. It shows your numbers are credible, not inflated by add-backs or accounting quirks.

4. You Reduce Price Re-Trades

Buyers often use diligence findings to justify lowering the offer. A strong QoE makes that harder to do.

Example:
A seller claims $1.5M EBITDA. A QoE finds $200K in non-recurring expenses and validates it. The buyer accepts the adjustment and maintains the $7M valuation.

What’s Inside a QoE Report

1. EBITDA Reconciliation

Adjusts reported earnings to reflect recurring operations. Removes one-time or owner-related expenses (e.g., personal car, travel, family payroll).

2. Revenue and Margin Analysis

Examines how revenue is earned, by customer, product, or geography. Look for seasonality, spikes, or inconsistencies.

3. Customer Concentration Review

If one client accounts for 40% of revenue, that’s a risk. A QoE highlights it so buyers can factor it into their continuity plans.

4. Working Capital Trends

Analyzes cash tied up in receivables, payables, and inventory. This is crucial for making later closing adjustments.

5. Debt and Cash Flow Coverage

Tests if the business generates enough consistent cash to service buyer debt.

6. Key Takeaways and Risks

A good QoE doesn’t just dump numbers — it explains what they mean for valuation, lending, and future growth.

How the QoE Fits Into the Deal Timeline

If you’re already post-LOI, the buyer will likely order their own QoE. But if you’re preparing to sell, commissioning one yourself can save time later.

What a QoE Costs — and Why It’s Worth It

A QoE from a reputable accounting firm typically costs:

• $10,000–$40,000 for small to mid-sized businesses, depending on complexity.

That might sound steep — until you realize the average post-diligence price reduction is 5–10%. On a $5M deal, that’s $250K–$500K in value protected.

Simply put: A good QoE pays for itself.

How to Choose the Right QoE Provider

Look for firms that:

• Specialize in M&A advisory, not just tax or audit work.

• Have experience in your industry size and structure.

• Provide plain-English summaries, not just spreadsheets.

• Are familiar with SBA or private-equity-level expectations.

Tip: Ask your broker or transaction attorney for referrals — they often have preferred providers with proven track records.

Common Seller Mistakes During the QoE Process

How the QoE Influences Deal Structure

• Valuation adjustments: Buyers may adjust the price based on verified EBITDA.

• Working capital targets: QoE informs baseline levels for closing adjustments.

• Financing approval: Banks rely on QoE findings for loan decisions.

• Earnout structuring: QoE clarifies which revenue streams are stable enough to support contingent payments.

In short: QoE determines not just whether a deal closes, but also how.

Don’t Take It Personally

It’s easy to feel like a QoE questions your credibility. It doesn’t.

Buyers aren’t doubting your integrity — they’re validating the investment. The more organized and cooperative you are, the smoother it goes.

At Sixty74, we tell sellers: “A good QoE isn’t a threat — it’s a badge of honor.” It proves what you’ve built stands up to scrutiny.

The Bottom Line: The Report That Builds Trust

Deals live or die on trust. The QoE report is where that trust is earned — in numbers, consistency, and transparency.

For buyers, it’s protection.
For sellers, it’s validation.
For both, it’s progress.

If you’re preparing to sell, a proactive QoE can help you move faster, negotiate stronger, and avoid painful surprises later.

If you’re interested in selling your business, let’s talk.