--- title: "Quality of Earnings (QoE) Report: What Owners Need to Know" description: "A quality of earnings report tests whether your profits are real, repeatable and backed by cash. Learn what buyers check and how to get ready before a sale." url: https://capstreet.multisites.ai/guides/quality-of-earnings publisher: Capstreet phone: +1-713-332-2700 contact: https://capstreet.multisites.ai/contact --- # Quality of earnings: what a QoE report checks and how to prepare for one A quality of earnings (QoE) report is an independent review of your financials that tests whether your reported profit is real, repeatable and backed by cash. Buyers use it to decide which earnings they will pay for. A clean QoE protects your price and speeds up diligence. Owner guideUpdated November 10, 20267 min read ![Downtown Houston skyline, home of Capstreet](https://capstreet.multisites.ai/_astro/houston-skyline.CI1wBZKY_Z21lbxH.webp) ## It tests your EBITDA A QoE reviews adjusted EBITDA, revenue, margins and cash. Buyers price your company on the earnings that survive this review. ## Add-backs need proof Owner pay, one-time costs and personal expenses can be added back only if you can support them with records. ## Working capital counts The review also sets the normal level of working capital, which affects the cash you receive at closing. ## Prepare before the LOI Owners should prepare the earnings bridge and support before the buyer has exclusivity, according to Auxo Capital Advisors. ## 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](https://capstreet.multisites.ai/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](https://capstreet.multisites.ai/glossary/adjusted-ebitda) and [EBITDA](https://capstreet.multisites.ai/glossary/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](https://capstreet.multisites.ai/guides/letter-of-intent). 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. Area What the reviewer checks Why a buyer cares Revenue Contracts, invoices, timing, customer mix Is revenue recurring and recorded in the right period? Margins Gross margin by line, trends, one-time swings Are margins stable or temporary? Expenses Completeness, period, unusual items Are all costs captured? Add-backs Owner pay, personal costs, one-time items Will these costs really go away? Working capital 12 to 24 months of cycles What is normal, so a target can be set? Cash conversion How much EBITDA turns into cash Can the business fund itself and its debt? Concentration Top customers, vendors, key employees What if one relationship leaves? 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](https://capstreet.multisites.ai/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](https://capstreet.multisites.ai/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. Often holds up (illustrative) Often challenged (illustrative) A documented one-time legal settlement Costs that repeat every year but are labeled one-time Personal expenses with clear records Mixed personal and business costs with no records Owner pay above a market-rate replacement Owner pay with no cost added for a replacement Rent adjusted to market where you own the building Savings the buyer must achieve in the future, or pro forma revenue from deals not yet signed 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.” Buyer flag Possible effect on the deal Unsupported add-backs Lower accepted EBITDA and price Revenue cut-off errors EBITDA adjustment or added indemnity protection Stale receivables Higher reserves, working capital dispute Unstable margins Lower forecast confidence, lower multiple Customer concentration Lower price, or an earnout Weak monthly close Longer diligence, larger holdbacks See how holdbacks and contingent payments work in our guides to [earnouts](https://capstreet.multisites.ai/guides/earnouts) and [rollover equity](https://capstreet.multisites.ai/guides/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. Option Strength Trade-off Sell-side QoE before marketing You see issues first and can fix them Cost and time before you know your buyer Wait for buyer’s QoE No upfront cost Buyer controls the findings and the story Clean monthly books and support only Low cost No independent view 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](https://capstreet.multisites.ai/guides/how-to-prepare-your-company-for-a-private-equity-sale) and the [due diligence checklist for owners](https://capstreet.multisites.ai/guides/due-diligence-checklist-for-owners). Our guide on [EBITDA multiples in the lower middle market](https://capstreet.multisites.ai/guides/ebitda-multiples-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](https://capstreet.multisites.ai/deal-criteria) and then start a confidential conversation at [/contact](https://capstreet.multisites.ai/contact), call 713-332-2700 or email [connect@capstreet.com](mailto:connect@capstreet.com). ## Frequently asked questions ### What is a quality of earnings report? A quality of earnings report is an independent analysis of a company's financials. Auxo Capital Advisors describes it as a transaction-focused test of whether reported earnings are recurring, properly recorded, supported by cash flow and likely to remain after a change of ownership. It centers on adjusted EBITDA. ### Is a QoE the same as an audit? No. CapitalPad notes a quality-of-earnings review examines the composition and sustainability of earnings and is not an audit or a guarantee of a higher price. An audit checks that financial statements follow accounting rules. A QoE asks which earnings a buyer can count on going forward. ### Who pays for a quality of earnings report? It depends. A buyer often hires an accounting firm during diligence and may pass costs along. A seller can hire a firm first, which is called a sell-side QoE. Ask the buyer in the letter of intent who pays, and ask accounting firms for quotes before you decide. ### Should I get a sell-side QoE before I go to market? Many owners find it helpful. KMCO, a CPA firm, says a sell-side QoE can find issues before you go to market, so you can fix them before a buyer finds them. Weigh the cost against the risk of surprises in diligence. Your banker and CPA can advise. ### What do buyers flag most often in a QoE? Auxo Capital Advisors lists unsupported EBITDA add-backs, revenue recorded in the wrong period, stale receivables, margins that depend on temporary conditions, customer concentration and a weak monthly close. Each can lower the earnings a buyer accepts, and the price that follows. ### Can a QoE change the price after the LOI? Yes. A letter of intent price is subject to diligence, and the QoE is part of that review. Auxo Capital Advisors notes that accepted EBITDA is not fixed in a preliminary report. If findings reduce EBITDA, the buyer may lower the price or change terms such as escrow or earnout. ## Terms on this page - [Working Capital Adjustment](https://capstreet.multisites.ai/glossary/working-capital-adjustment) - [Lower Middle Market](https://capstreet.multisites.ai/glossary/lower-middle-market) - [Quality of Earnings](https://capstreet.multisites.ai/glossary/quality-of-earnings) - [Letter of Intent](https://capstreet.multisites.ai/glossary/letter-of-intent) - [Adjusted EBITDA](https://capstreet.multisites.ai/glossary/adjusted-ebitda) - [Rollover Equity](https://capstreet.multisites.ai/glossary/rollover-equity) - [Private Equity](https://capstreet.multisites.ai/glossary/private-equity) - [Due Diligence](https://capstreet.multisites.ai/glossary/due-diligence) - [Add-Backs](https://capstreet.multisites.ai/glossary/add-backs) - [Earnout](https://capstreet.multisites.ai/glossary/earnout) ## Sources 1. [Auxo Capital Advisors: Quality of Earnings (QoE) in M&A, What Buyers Flag](https://auxocapitaladvisors.com/qoe-what-buyers-flag/) 2. [Auxo Capital Advisors: Quality of Earnings (QoE) in M&A, What Buyers Flag (preparation)](https://auxocapitaladvisors.com/qoe-what-buyers-flag/) 3. [Auxo Capital Advisors: Quality of Earnings (QoE) in M&A, What Buyers Flag (fewer adjustments)](https://auxocapitaladvisors.com/qoe-what-buyers-flag/) 4. [Auxo Capital Advisors: Quality of Earnings (QoE) in M&A, What Buyers Flag (not fixed)](https://auxocapitaladvisors.com/qoe-what-buyers-flag/) 5. [KMCO: 7 Benefits of a Sell-Side Quality of Earnings Report](https://www.kmco.com/insights/7-benefits-of-a-sell-side-quality-of-earnings-report/) 6. [KMCO: 7 Benefits of a Sell-Side Quality of Earnings Report (buyer doubt)](https://www.kmco.com/insights/7-benefits-of-a-sell-side-quality-of-earnings-report/) 7. [CapitalPad: Lower Middle Market EBITDA Multiples](https://capitalpad.com/lower-middle-market-ebitda-multiples/) 8. [CapitalPad: Lower Middle Market EBITDA Multiples (not an audit)](https://capitalpad.com/lower-middle-market-ebitda-multiples/) 9. [CapitalPad: Lower Middle Market EBITDA Multiples (expenses)](https://capitalpad.com/lower-middle-market-ebitda-multiples/) 10. [Alpine Investors: What to Know Before Selling your Business to Private Equity](https://alpineinvestors.com/resource/selling-your-business/) Written by Capstreet and checked against the sources above on November 10, 2026. Market figures and deal practice change, and nothing here is legal, tax or investment advice. Ask your own advisers before you act. ## Keep reading - [How to Get Ready for a Quality of Earnings ReportA quality of earnings report is a financial review that tests whether a company's profit is accurate and will repeat. Buyers order one during diligence. To prepare, close your books monthly, document every add-back, separate owner expenses and know your working capital pattern before the buyer's accountants arrive.](https://capstreet.multisites.ai/insights/how-to-get-ready-for-a-quality-of-earnings-report) - [The due diligence checklist for owners selling to private equityDue diligence is the buyer's check of your business after you sign a letter of intent. Private equity firms review five areas: financial (quality of earnings), operations, tax, HR and benefits, and legal. Owners who gather clean records before the process starts shorten it and face fewer surprises.](https://capstreet.multisites.ai/guides/due-diligence-checklist-for-owners) - [EBITDA multiples in the lower middle market: what buyers paid and why prices differIn the first nine months of 2025, GF Data reported private equity buyers paying an average of 6.4x EBITDA for deals with enterprise value of $10 million to $25 million, and 6.8x for $25 million to $50 million. Averages hide wide gaps. Earnings quality, customers and management move your multiple.](https://capstreet.multisites.ai/guides/ebitda-multiples-lower-middle-market) - [Capstreet deal criteria: the companies we look forCapstreet looks for entrepreneur-owned business services companies with $3 to $15 million of EBITDA. We make primarily majority investments, and entrepreneurs reinvest alongside Capstreet. We want a tenured team, solid financials, a defensive business model, untapped growth potential and a niche advantage. We invest across 12 industries.](https://capstreet.multisites.ai/deal-criteria) - [How to prepare your company for a private equity sale: a 12 to 24 month planStart 12 to 24 months before you plan to sell. Clean up your financials, support every add-back, build a team that can run without you, spread your customer base and organize your records. Buyers pay more for earnings they can verify and a business that does not depend on one person.](https://capstreet.multisites.ai/guides/how-to-prepare-your-company-for-a-private-equity-sale) - [Earnouts: how they work, how long they last and how to protect your payoutAn earnout is extra purchase price you receive after closing only if the company hits agreed targets during a set period. Most last one to three years, and the median outside life sciences is 24 months. Earnouts bridge price gaps but cause disputes, so the contract details matter.](https://capstreet.multisites.ai/guides/earnouts) ## Ready to get started? Let’s talk. Tell us about your company and what you want next. Conversations are private, and there is no obligation. [Start a conversation](https://capstreet.multisites.ai/contact) [(713) 332-2700](tel:+1-713-332-2700)[connect@capstreet.com](mailto:connect@capstreet.com) ![Capstreet team members at a Houston elementary school for Houston Reads Day](https://capstreet.multisites.ai/_astro/houston-reads-day.DxNd9bIr_tggWP.webp)