Quality of earnings: what a QoE report checks and how to prepare for one

What is a quality of earnings report?

A quality of earnings, or QoE, report is an independent review of your financials. It tests whether your reported profit is real, repeatable and backed by cash. Buyers use it to decide which earnings they will pay for.

Auxo Capital Advisors, an M&A advisory firm, defines it in a 2025 article as “a transaction-focused analysis of whether reported earnings are recurring, properly recorded, supported by cash flow, and likely to remain available after a business changes ownership.” A CPA or accounting firm usually prepares it. Read the short definition in our glossary: quality of earnings.

KMCO, a CPA firm, puts it plainly in an April 2026 article. A QoE answers the question every buyer asks: if I buy this company today, can I expect these profits to continue tomorrow? The report centers on adjusted EBITDA. See adjusted EBITDA and EBITDA in our glossary.

A QoE is not an audit. CapitalPad notes that a quality-of-earnings review “can identify adjustments, timing issues, and working-capital needs, but it is not an audit or a guarantee of a higher price.”

Why do buyers ask for a quality of earnings report?

Buyers ask for it because they pay for earnings, not for stories. A multiple of EBITDA sets the price, so every dollar of EBITDA they accept or reject changes what they pay. The QoE tells them which dollars to trust.

Alpine Investors, a private equity firm, lists quality of earnings as the first workstream of confirmatory diligence, next to operations, tax, HR and legal reviews. That review starts after the letter of intent, when you have already granted exclusivity. See our letter of intent guide.

Auxo Capital Advisors says a weak review can lower the earnings a buyer accepts, compress the multiple, change the working capital target, expand escrow or move value into an earnout. A clean review can confirm the earnings base, reinforce lender confidence and shorten negotiation.

Here is a simple example. This one is for illustration only. You show $5 million of EBITDA and the buyer applies a multiple of 6. That implies $30 million. The QoE accepts only $4.5 million after removing an add-back it cannot support. At the same multiple, the price falls to $27 million. One rejected adjustment moved the price by $3 million.

What does a QoE report cover?

A QoE covers your profit, your revenue, your costs, your working capital and your cash flow. It checks each against records and looks for items that will not repeat. The report ends with an adjusted EBITDA figure the buyer can rely on.

Auxo Capital Advisors describes the scope this way: buyers trace revenue to contracts, invoices, delivery evidence and cash receipts. They test expenses for completeness and proper period recognition. They check whether add-backs are truly non-recurring and whether margins are stable. KMCO adds revenue by customer, gross margin by product line and the impact of accounting policies.

KMCO notes that the review of working capital sets the target level the buyer will expect at closing. If the target is set too high, you leave more cash in the business. Read about the adjustment in our glossary: working capital adjustment.

What are add-backs, and which ones hold up?

Add-backs are costs you remove from expenses to show true earnings, such as one-time legal fees or personal costs paid by the company. They only count if you can prove they are not part of normal operations.

KMCO gives examples of add-backs: a legal settlement, a non-recurring equipment repair, or an owner’s personal travel. It also says that if you paid yourself more than a market rate as CEO, the report can add the extra back to profit. The reverse also happens. If you underpay rent because you own the building, the report can adjust the expense up to market rates. Learn the term in our glossary: add-backs.

CapitalPad adds a warning. “An expense is not removable simply because a seller calls it discretionary.” Buyers want proof, and they also want the costs that will continue after closing, such as a paid manager to replace you.

Auxo Capital Advisors advises sellers to present “fewer strong adjustments rather than a long bridge filled with speculative items.” One overstated item can make the buyer doubt the rest.

What do buyers flag in a QoE?

Buyers flag items that lower confidence in your numbers. The usual flags are unsupported add-backs, revenue in the wrong period, stale receivables, unstable margins, customer concentration and a weak monthly close. Fix these before a buyer finds them.

Auxo Capital Advisors lists these flags in a table of buyer concerns and their effects. KMCO adds insufficient records, unrecorded liabilities, tax uncertainties, bad inventory and inconsistent accounting policies. KMCO notes: “Having a buyer identify issues during their due diligence creates doubt.”

See how holdbacks and contingent payments work in our guides to earnouts and rollover equity.

Should you get a sell-side QoE before you go to market?

A sell-side QoE can help if you want to find and fix issues before buyers do. It adds a cost and takes time. It does not guarantee a higher price. Talk to your banker and CPA about whether it fits your timeline.

KMCO lists benefits: it normalizes earnings with outside support, finds problem areas early, gives a working capital analysis and reviews concentrations. Its key point is that early issue identification can prevent price reductions in diligence. CapitalPad reports that GF Data’s analysis of deals from Q3 2024 through Q2 2025 found higher overall multiples for companies with sell-side QoE work, while the relationship reversed in its smaller size tiers. Deal mix affected the comparison. Treat it as a hint, not a promise.

Even if you skip the report, prepare as if you will have one. The steps below apply either way.

How do you prepare for a QoE?

Start with monthly closes, clean records and a list of every add-back with proof. Gather your last three years of revenue by customer and product. Know your working capital cycle. Do this before a buyer asks.

Alpine Investors says buyers typically want to see “revenue over the last three years, broken down by service or product offering,” plus net income and EBITDA. Auxo Capital Advisors tells owners to prepare the earnings bridge, revenue policies, add-back support, working capital schedules and cash conversion analysis before buyers gain exclusivity.

Use this checklist.

1. Close your books every month, on time, and reconcile them to the general ledger.
2. Build an earnings bridge from net income to adjusted EBITDA. List each add-back with proof.
3. Write down your revenue recognition policy and apply it the same way every month.
4. Pull revenue by customer and by product for three years.
5. Clean up old receivables and unused inventory.
6. Compute working capital by month for 12 to 24 months.
7. List customer, vendor and employee concentration.
8. Review contracts that affect earnings, such as pricing, rebates and related-party deals.
9. Pick one finance contact to answer buyer questions quickly.
10. Review the list with your CPA and your lawyer before any buyer asks.

For a wider plan, read how to prepare your company for a private equity sale and the due diligence checklist for owners. Our guide on EBITDA multiples in the lower middle market shows how earnings turn into price.

Next step

Capstreet states its criteria as “$3 to $15 million of EBITDA.” If your numbers are in that range and you want to talk, review our deal criteria and then start a confidential conversation at /contact, call 713-332-2700 or email connect@capstreet.com.