A quality of earnings (QoE)—QoE meaning ‘quality of earnings’—report helps buyers and investors determine whether a company’s earnings are sustainable and whether the business is worth what the deal suggests. It typically adjusts EBITDA, reviews revenue quality, analyzes working capital and identifies risks that could affect valuation during a merger, acquisition or investment.
In many transactions, QoE findings directly influence purchase price, deal structure and negotiations—making it one of the most critical steps in financial due diligence.
For business owners preparing to sell, understanding how buyers evaluate earnings through QoE can help you identify risks early and increase your valuation before going to market.
During a merger or acquisition (M&A) or investments, a Quality of Earnings (QoE) report helps uncover issues that aren’t visible in standard financial statements. QoE findings often influence valuation, deal structure and post-close expectations.
QoE reports are an essential part of the due diligence process for both the buyer side and seller side. These reports shed light on a company’s cash flow, adjusted earnings and working capital. Recognizing the importance of a well-structured QoE analysis can make the difference between a successful transaction and a costly misstep.
Key Takeaways
- A quality of earnings (QoE) report evaluates whether a company’s reported earnings accurately reflect sustainable operating performance.
- QoE analysis adjusts EBITDA, reviews revenue quality and analyzes working capital.
- Buyers and sellers rely on QoE reports during mergers and acquisitions to identify financial risks and validate valuation.
What is a Quality of Earnings (QoE) Report?
A quality of earnings report is a third-party financial analysis used during due diligence to assess the sustainability and drivers of a company’s earnings.
A typical QoE report evaluates:
- Adjusted EBITDA and normalization adjustments
- Revenue recognition and revenue quality
- Working capital trends and requirements
Debt-like items and accounting policies
In finance, QoE stands for “quality of earnings.” It refers to how sustainable, reliable and repeatable a company’s earnings are—not just how much profit is reported. To understand how these findings ultimately impact what your business is worth, see What Is Business Valuation.
What Does QoE Mean in Finance and M&A?
Quality of earnings analysis focuses on identifying factors that may distort profitability, such as:
- Changes in working capital
- One-time or non-recurring transactions
- Aggressive or inconsistent accounting policies
- Revenue recognition issues
Many of these adjustments ultimately trace back to how your business generates revenue and profit—see profit drivers.
If you’re evaluating a transaction and need clarity on whether reported earnings will hold up after close, this is typically where organizations engage a QoE provider.
Quality of Earnings Report vs Audit: What’s the Difference?
While a financial audit confirms GAAP compliance, a Quality of Earnings report evaluates whether earnings are sustainable after a transaction closes. The purpose of an audit is to confirm the accuracy of financial statements while a QoE report evaluates a business’s financial health to aid an M&A transaction. A QoE looks at historical data and examines potential risks, providing a more holistic view of business trends, operating patterns and other adjustments affecting valuation that aren’t typically covered in a standard audit.
Potential buyers and current business owners both benefit from the comprehensive analysis, which can reveal many factors impacting future cash flow, such as customer concentration.
In short, an audit confirms whether financial statements are presented fairly under GAAP, while a quality of earnings report evaluates whether the underlying earnings are sustainable.
Why Quality of Earnings Reports Matter in M&A Due Diligence
A QoE report is one of the most important tools in M&A because it determines whether reported earnings will hold up after the transaction closes.
Buyers use QoE analysis to assess whether earnings will continue after close, while sellers use it to support valuation and reduce deal friction. QoE reports serve as a third-party analysis that scrutinizes a company’s economic earnings, adjusting for non-recurring or unusual items that could distort the reported financial performance.
By conducting a QoE analysis, stakeholders can identify issues impacting business value and receive recommendations on addressing these concerns. This proactive step not only clarifies potential risks but also aids in avoiding renegotiations, thus streamlining the sale process and enhancing transaction value.
Understanding how these adjustments affect valuation is also important, since buyers and advisors often rely on several business valuation methods — including income, market and asset-based approaches — to determine what a company is worth during a transaction.
What Does a Quality of Earnings Analysis Include?
A typical quality of earnings analysis includes several steps:
- Reviewing historical financial statements and accounting policies
- Identifying non-recurring or non-operating income and expenses
- Normalizing EBITDA through adjustments
- Evaluating revenue quality and customer concentration
- Analyzing working capital trends
- Validating cash flow through proof-of-cash procedures
Adjusted EBITDA Explained
Adjusted EBITDA is one of the most important outputs of a QoE report because it reflects the company’s true operating performance after removing non-recurring items.
Because quality of earnings analysis often uncovers issues affecting valuation, purchase price and deal structure, many buyers and sellers engage experienced advisors to perform the analysis before entering negotiations.
Strong projections and forecasting also support these adjustments by demonstrating future performance—see Forecasting Your Business Cash Flow.
Advantages of a QoE Report
A QoE report is a pivotal asset for prospective buyers embarking on the acquisition journey. Buyers can also benefit from improved leverage in negotiations and an accelerated transaction timeline thanks to a more streamlined sale process. These benefits also translate to sellers, who can take advantage by resolving identified issues to improve valuation and speed up the sale. Addressing all financial performance aspects up front can also help minimize litigation risks.
Addressing these findings early can significantly increase your valuation before a sale—see How to Maximize Business Value Before You Sell.
Key Components of a QoE Report
Most quality of earnings reports include several core sections that help buyers and sellers evaluate the company’s true financial performance during due diligence.
- Executive summary
- Income statement and adjusted EBITDA analysis
- Balance sheet analysis
- Working capital analysis
- Cash flow and proof-of-cash review
Executive Summary:
Provides a concise overview of findings and insights, setting the stage for detailed analysis.
Balance Sheet Analysis:
Examines balance sheet items, ensuring that accounting policies align with standard practices.
Working Capital Analysis:
This analysis helps potential buyers understand the company’s operational efficiency and identify any liquidity issues that could affect future performance.
Income Statement and Quality of Earnings Analysis:
Adjusts financial statements to normalize earnings for timing differences, revenue recognition issues and one-time items, helping stakeholders better understand recurring profitability. Common adjustments include removing one-time legal costs, excess owner compensation or revenue recognized ahead of cash collection.
Additionally, the report includes a comprehensive trend analysis, reviewing key performance indicators (KPIs), historical performance patterns and potential areas for operational enhancements that could affect the company’s valuation. Another component, the “Proof of Cash,” verifies that your cash flow aligns with recorded revenues and expenses. Despite these common sections, the structure can vary significantly, tailored to a company’s unique financial landscape and the specific needs of the engagement.
Anders Deal Advisory and Strategy Advisors help buyers and sellers conduct quality of earnings analysis to better understand earnings sustainability, working capital and transaction risk. If you’re preparing for a transaction or evaluating an opportunity, a QoE analysis can provide clarity on earnings, valuation and deal risk before moving forward.