A Quality of Earnings (QoE) report is an independent, accountant-prepared analysis that verifies a seller's reported earnings and normalizes them, testing every add-back, checking revenue recognition, and separating recurring profit from one-time items. It confirms the SDE or EBITDA you're actually buying.
What a QoE catches
Say a seller claims $350,000 SDE. A QoE re-examines the add-backs and finds:
- $25,000 of "one-time" costs that actually recur annually
- $15,000 of revenue booked before it was earned
Normalized SDE drops to $310,000. At 2.7×, that's an $108,000 lower defensible price, often more than the QoE costs many times over.
Why it matters when buying a business
You pay a multiple of earnings, so an inflated earnings number means you overpay on every dollar of the multiple. A QoE is your defense against aggressive add-backs, and lenders increasingly expect one on larger deals. It also arms you to renegotiate the LOI price if the numbers don't hold.
