When You Need a Quality of Earnings (QoE) Report

Q: When do you need a Quality of Earnings (QoE) report?

You need a Quality of Earnings (QoE) report when you’re buying, selling, raising capital, or refinancing and stakeholders need to verify the true, sustainable earnings of the business—not just what the income statement shows. A QoE analyzes revenue quality, margin stability, customer concentration, working capital trends, and adjusted EBITDA (normalization) to identify one-time items, accounting distortions, and risks that affect valuation. Buyers use QoE to avoid overpaying, sellers use it to defend valuation, and investors/lenders use it to confirm the earnings story can withstand due diligence.

1. Overview

A Quality of Earnings (QoE) Report is a deep, transaction-focused financial analysis prepared by a CPA—most commonly during mergers, acquisitions, or major investments.

Some CPA firms perform QoE as part (a subset) of their financial due diligence or as a standalone service.

In plain English:

Due diligence is the full investigation of a business before a deal. Quality of earnings is the part of that investigation that checks whether the profits being reported are real, sustainable, and properly stated or If you like analogies, due diligence is the full medical exam while Quality of Earnings is the blood test that checks if the core numbers are real.

Unlike a standard audit or review, a QoE analyzes the true, sustainable earnings of a business by examining:

• Revenue quality and trends

• Normalized EBITDA

• Adjustments for one-time or non‑recurring items

• Working capital needs

• Customer concentration

• Internal controls and risks

A QoE helps buyers avoid surprises, supports sellers in defending value, and gives lenders or investors confidence in the numbers.

2. Who Needs This & When

A QoE is typically needed when:

• You are selling your business and want to justify your valuation.

• You are buying a business and need confidence that the EBITDA presented is accurate.

• An investor requests deeper analysis than standard compiled or reviewed financial statements.

• A lender is financing an acquisition and needs assurance on earnings stability.

• A PE/VC fund wants a normalized view of performance before committing capital.

You should request a QoE when:

• The transaction value is meaningful (typically $1M+)

• You need clarity on what the business really earns after removing unusual items

• You want to avoid post‑deal disputes related to working capital or EBITDA adjustments

3. Real-World Scenarios

Common examples:

• A buyer wants to confirm that the seller's EBITDA includes non-recurring consulting fees that should be removed.

• A seller wants to show that revenue dips were caused by a temporary supply chain issue, not long-term decline.

• A bank wants working capital calculations evaluated before approving an acquisition loan.

• A PE fund wants to verify customer concentration risk before finalizing a deal.

• A founder wants a defensible valuation before negotiating with strategic buyers.

4. Regulatory / Third-Party Background

QoE reports are not regulated in the same way as audits or reviews. They follow:

• AICPA ethical and professional standards

• M&A best practices

• Firm-level methodologies

QoEs are often required by:

• Banks and acquisition lenders

• Private equity firms

• Venture capital funds

• Corporate development teams

• M&A advisors or brokers

Stakeholders value QoE reports because they provide deeper insight than traditional financial statements.

5. Industries Where This Is Most Relevant

QoE reports are especially common in:

• Healthcare practices and clinics

• Construction companies

• Manufacturing & distribution

• SaaS and technology firms

• Hospitality & franchise groups

• Professional service firms

• E‑commerce and retail businesses

Any industry with recurring revenue, seasonality, or cash complexities benefits from a QoE.

6. What the CPA Actually Does / Documents Needed

A QoE typically includes:

Key Procedures

• Revenue analysis (pricing, returns, churn, concentration)

• Expense review (one-time, discretionary, owner-specific)

• EBITDA normalization

• Working capital analysis (by month and season)

• Cash vs accrual adjustments

• Review of accounting policies

• KPI trend review

Documents Needed

You'll typically provide:

• Financial statements (3+ years preferred)

• General ledger

• Tax returns

• Bank statements

• Customer and vendor listings

• Accounting policies

• Budgets/forecasts

• Major contracts or agreements

7. Deliverables (with Illustrative Excerpt)

Deliverables typically include a detailed Quality of Earnings Report that summarizes:

• Adjusted EBITDA

• Key risks

• Revenue trends

• Working capital benchmarks

• Normalization adjustments

• Sustainability of earnings

Illustrative excerpt:

"Adjusted EBITDA for the year ended December 31 is estimated at $2.8M after normalizing for non-recurring legal expenses of $420,000 and owner compensation adjustments of $310,000. Customer concentration remains high, with the top three customers representing 57% of total revenue."

8. Timeline & Fee Ranges

Typical timeline:

• Standard QoE: 3–6 weeks

• Complex transactions: 6–10+ weeks

Typical fee ranges:

• Smaller businesses: $15,000–$35,000+

• Mid-market transactions: $35,000–$85,000+

• Large or complex deals: $100,000–$300,000+

Drivers of cost include data quality, number of adjustments, and industry complexity.

9. Common Mistakes

• Relying solely on tax returns or internal financial statements

• Using EBITDA without reviewing normalization adjustments

• Ignoring working capital—leading to disputes at closing

• Performing the QoE too late in the deal process

• Overlooking cash vs accrual discrepancies

10. HowJedidiah CPA Can Help

Jedidiah CPA can help you:

• Evaluate whether you need a QoE or a lighter analysis

• Perform buy-side or sell-side QoE engagements

• Prepare your financials before going to market

• Identify adjustments that strengthen valuation

• Provide clarity to investors, lenders, and buyers

• Support negotiations with clean, defensible numbers

Whether you are selling, buying, or raising capital, our goal is to help you make confident, well-informed decisions.

Disclaimer

This article is for general informational purposes only and is not accounting, tax, legal, or transactional advice. QoE engagements must be performed under a formal engagement letter by a qualified CPA. Requirements vary by transaction type and industry. Consult a professional for advice specific to your situation.

FAQs

What is included in a QoE report?

A typical QoE covers revenue quality, gross margin trends, customer concentration, expense testing, adjusted EBITDA/normalization, working capital analysis, and key risk findings that impact valuation.

How is a QoE different from an audit or review?

A QoE is transaction-focused and evaluates earnings sustainability and deal risk. An audit or review focuses on financial statement assurance under professional standards, not valuation drivers or deal adjustments.

Who usually requests a QoE report?

Common requesters include private equity firms, strategic buyers, search funds, lenders, investors, and sellers preparing for a transaction or fundraising round.

What documents are needed to start a QoE?

Usually: monthly financial statements, general ledger detail, trial balance, bank statements, revenue/customer reports, payroll reports, major contracts, and a list of one-time or unusual items.

How long does a QoE report take?

Timing depends on the scope, data quality, and responsiveness. Organized records and clear deal timelines typically speed up the process significantly.