What is a quality of earnings (QoE) report? Definition and example
This is for anyone about to buy a business, lend against one, or sell one and face a buyer's accountants. By the end you will know what a quality of earnings (QoE) report is, who writes it, what it costs in rough terms, and how its findings change the price.
The definition in plain words
A quality of earnings (QoE) report answers one question: is the profit real? A seller's profit-and-loss statement shows what the owner says the business earned. The QoE tests that claim line by line.
It is not an audit. An audit asks whether the financial statements follow accounting rules. A QoE asks whether the earnings will keep coming after the owner leaves and the deal closes. Investopedia's quality of earnings page puts it simply: high-quality earnings come from sales and cost control, not from accounting choices or one-off events.
The report is usually written by a CPA firm that does transaction work. It is not the company's own auditor or bookkeeper, because the buyer wants a fresh pair of eyes.
What the report covers
Most QoE reports work through the same list. The headings vary, but the questions do not.
- Revenue. Is it recorded in the right period? Are any big customers slowing down or leaving?
- Add-backs. Which of the owner's adjustments are fair, and which are everyday costs dressed up as one-time items?
- Owner pay. What would it cost to replace the owner with a manager at market salary?
- Cash. Does the profit show up in the bank, or is it stuck in unpaid invoices and inventory?
- Working capital. How much cash does the business need on hand to run normally? This sets the working capital peg in the purchase agreement.
- Debt and debt-like items. Unpaid bonuses, deferred rent, customer deposits and tax owed all reduce what the buyer should pay.
The output is a bridge from the EBITDA the seller reported to the EBITDA the accountants believe. The same logic applies to seller's discretionary earnings in smaller deals.
Illustrative example: the EBITDA bridge
Here is an illustrative bridge for a $4.5M services business. The numbers are made up but add up.
| Line (illustrative) | Amount | Why |
|---|---|---|
| Reported EBITDA (seller's P&L) | $1,000,000 | Starting point from the broker's package |
| Add: one-time legal settlement | +$60,000 | Paid once, will not repeat |
| Add: owner salary above market | +$40,000 | Owner took $190,000; a manager costs $150,000 |
| Less: revenue booked early | −$85,000 | December invoices for January work |
| Less: bonuses earned but not accrued | −$35,000 | Staff bonuses paid after year end |
| Less: rent below market | −$30,000 | Owner's building leased to the business cheaply |
| QoE-adjusted EBITDA | $950,000 | What a buyer should price |
At a 4.5x multiple, the seller's number supports a $4,500,000 price. The adjusted number supports $4,275,000. The report just moved the price by $225,000, which is many times what it cost.
Two of the lines went in the seller's favour. A fair QoE finds both kinds. A buyer who only looks for deductions will lose the seller's trust and often the deal.
Where it shows up in a deal
The QoE sits in due diligence, after the letter of intent is signed and before the purchase agreement is final. The buyer orders it and pays for it. Lenders and investors often ask to see it on larger deals before they commit money. The SBA's 7(a) loan page explains the program most small buyers use, and many of those lenders want the earnings checked independently above a certain loan size.
Sellers can order their own QoE before going to market. This is called a sell-side QoE. It costs the seller money, but it finds problems early and makes the buyer's review faster. Our guide to selling a business covers when that is worth doing.
Cost depends on the size of the business and how clean the books are. For a small company expect a few thousand dollars; for a larger one, tens of thousands. Scope matters more than the headline fee, so ask what is covered.
Common mistakes
Buyers skip the QoE to save money, then find the problems after closing when it is too late to change the price. On a deal above about a million dollars the report usually pays for itself.
Buyers also treat the report as a verdict instead of a tool. A QoE that cuts EBITDA by 5% is a reason to adjust the price or the working capital peg, not to walk away.
Sellers make the opposite mistake. They pile up add-backs that will not survive a review, and the price falls late in the process. Clean numbers before you list. Our guide to buying a business shows where the QoE fits among the other steps.
Questions people ask
Is a QoE the same as an audit?
No. An audit tests whether the statements follow accounting rules. A quality of earnings report tests whether the profit is real, repeatable and backed by cash, and restates EBITDA for a buyer.
Who pays for a quality of earnings report?
The buyer usually orders and pays for it during due diligence. A seller may order a sell-side QoE before listing, to find problems early and speed up the buyer's review.
How long does a QoE take?
Two to six weeks is typical, depending on the size of the business and how fast the seller provides records. Clean bookkeeping and ready bank statements shorten it.
What does a QoE report cost?
It depends on the size and the scope. A small, simple business might cost a few thousand dollars to review; a larger company with several locations can run to tens of thousands. Ask for a fixed scope and fee up front.
Can a QoE change the purchase price?
Yes. If adjusted EBITDA comes in below the seller's figure, buyers usually ask to lower the price, raise the seller note, or change the working capital peg. Sellers can push back with evidence.
Sources
- investopedia.com — https://www.investopedia.com/terms/q/qualityofearnings.asp
- sba.gov — https://www.sba.gov/funding-programs/loans/7a-loans
Pober, M. (2026). What is a quality of earnings (QoE) report? Definition and example. Acquisitions.com. https://acquisitions.com/blog/what-is-a-quality-of-earnings-report/
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