What Is a Quality of Earnings Report?

What Is a Quality of Earnings Report?

A Quality of Earnings report (QofE) is an independent financial analysis that verifies a business's true, sustainable earnings before a sale closes. It is commissioned by the buyer — or sometimes a prepared seller — and produced by an accounting firm that specializes in mergers and acquisitions. The goal is to strip away one-time items, confirm add-backs, and deliver a defensible earnings number that both sides can trade on.

In small business deals, the QofE typically costs $25,000 to $75,000 and takes three to six weeks. It is not an audit. It is a forensic look at how your EBITDA or Seller's Discretionary Earnings actually behaves, month by month, customer by customer, for the trailing twelve months. For a clear primer on the earnings metrics that a QofE tests, see our guide to SDE vs EBITDA.

A QofE typically covers the trailing twelve months in full detail, plus the prior two fiscal years at a summary level, and the most recent year-to-date period. Expect the accounting team to request bank statements, tax returns, general ledger detail, payroll registers, customer revenue detail, and management commentary on every anomaly they find.

Why It Matters

A QofE matters because it usually moves the purchase price. Buyers use it to confirm the number they are paying a multiple on. If the report disallows $200,000 of claimed add-backs, a buyer paying a 4x multiple will cut $800,000 from the offer — or walk away. This is the single most common reason deals get repriced after an LOI is signed.

What the QofE actually digs into:

• Add-back validation: Every owner perk, one-time expense, and personal cost is tested against documentation.
• Revenue quality: Recurring versus one-time revenue, customer concentration, and churn patterns.
• Margin trends: Whether gross margin is truly stable or inflated by a one-off price hike or supplier rebate.
• Working capital: The normal level of cash, AR, inventory, and AP needed to run the business day-to-day.
• Proof of cash: Bank statements reconciled to the P&L to confirm revenue actually landed.
• Quality of revenue: Whether revenue recognition practices match accrual standards and whether refunds, chargebacks, or returns are properly booked.

Private equity buyers require a QofE on nearly every deal above roughly $2 million in EBITDA. Strategic buyers and individual operators are increasingly requesting them on smaller deals too, particularly when SBA financing is involved and the bank wants independent confirmation of earnings before underwriting.

How to Use It

If you are the seller, commission a sell-side QofE before you go to market. It costs money up front, but it protects your price. A clean sell-side QofE lets you publish a defensible EBITDA number in the CIM, speeds up buyer diligence, and removes the surprise factor that kills deals in the final weeks. Learn how this fits into a broader exit in our exit planning hub. A sell-side report also gives you six months to fix issues the report surfaces — misclassified expenses, weak revenue documentation, or sloppy add-back support — before a buyer ever sees them.

If you are the buyer, the QofE is non-negotiable on any deal where you are paying a meaningful multiple. Never rely on the seller's internal financials alone. Scope the QofE to the risks that matter most in your thesis: customer concentration if you are worried about churn, working capital if the business is seasonal, or proof of cash if revenue recognition looks aggressive. For a full picture of what QofE fits into, read our companion guide on what happens during business sale due diligence.

At YourExitValue, we help owners get their numbers QofE-ready months before they list — because you cannot fix a $400,000 add-back problem three weeks before closing.