A quality of earnings (QoE) report is an independent analysis, usually by an accounting firm, that verifies a business's real, sustainable profit before you buy. It tests the seller's add-backs, separates recurring from one-time revenue and expenses, and confirms a defensible SDE or EBITDA figure so you don't overpay on inflated numbers. Example: a seller claims $300,000 SDE; the QoE finds $40,000 of the add-backs aren't legitimate, so true SDE is $260,000, and at a 3× multiple that's $120,000 less the business is worth.
Why it matters so much
Price is usually a multiple of earnings. If the earnings number is wrong, the price is wrong by the same multiple. A QoE is the diligence step that pressure-tests the single number your whole valuation rests on.
| Figure | Seller's claim | After QoE |
|---|---|---|
| Adjusted SDE | $300,000 | $260,000 |
| Implied value at 3× | $900,000 | $780,000 |
| Difference | $120,000 overpayment avoided | |
What a QoE examines
- Add-back validity, are the owner perks and "one-time" costs real and truly non-recurring?
- Revenue quality, recurring vs. one-off, and customer concentration risk.
- Expense normalization, under-stated costs a new owner will actually incur.
- Working capital, the cash the business needs to keep running.
- Trends, is profit growing, flat, or quietly declining?
The seller's spreadsheet is a sales document. A QoE is the second opinion that protects your money.
QoE vs. an audit
They're not the same. An audit gives an opinion on whether financial statements comply with accounting standards for a past period. A QoE is a forward-looking buyer's diligence tool focused on how sustainable and normalized the earnings are, trends, concentration, working capital, and add-backs, rather than issuing an audit opinion. It's not legally required, but on a meaningful deal it often pays for itself by catching a problem or supporting a price cut. See the broader valuation guide and deal team.
Frequently asked questions
An independent analysis, usually by an accounting firm, that verifies a business's real and sustainable profit before you buy. It tests the seller's add-backs, separates recurring from one-time items, and confirms a defensible SDE or EBITDA.
No. An audit opines on compliance with accounting standards for a period. A QoE is a forward-looking buyer's tool focused on how sustainable and normalized earnings are, trends, concentration, working capital, and add-back validity.
Not legally required, but for a meaningful acquisition it's one of the smartest ways to protect your money. Because price is a multiple of earnings, an inflated figure inflates the price. A QoE often pays for itself.
