In business sales and mergers & acquisitions (M&A), one of the most critical steps in due diligence is determining whether the business’s reported earnings truly reflect its sustainable, operational profitability.
That’s where a Quality of Earnings (QoE) report comes in.
💡 What Is a Quality of Earnings Report?
A Quality of Earnings report is a detailed financial analysis—typically prepared by a CPA firm with M&A experience—that evaluates the accuracy, sustainability, and sources of a company’s earnings.
It goes beyond standard financial statements to identify:
- Normalized earnings (removing one-time or non-operating items)
- Adjustments for owner perks, non-cash expenses, or extraordinary events
- Customer or product profitability concentrations
- Seasonality effects on revenue
- Potential earnings risks going forward
Goal: To give the buyer (and sometimes the seller) a clear, accurate picture of what the business truly earns in a normal operating year.
📊 Why QoE Matters in Business Sales
1. Builds Trust Between Buyer and Seller
Accurate, well-documented earnings make negotiations smoother and reduce the risk of post-closing disputes.
2. Supports Valuation
Businesses are often valued based on a multiple of earnings. If earnings aren’t reliable, the valuation can swing dramatically.
3. Reveals Risks Early
QoE analysis can uncover issues like revenue concentration, declining margins, or accounting irregularities—before they derail the deal.
4. Speeds Up Financing Approval
Lenders (especially SBA and institutional lenders) often want assurance that earnings are sustainable before funding an acquisition.
🧠 Who Should Prepare the QoE—Buyer or Seller?
When the Buyer Prepares It
- Most Common Scenario in M&A and business sales.
- The buyer hires an independent accounting or advisory firm after signing a Letter of Intent (LOI) as part of due diligence.
- Objective: Verify the seller’s numbers and identify potential risks before finalizing the purchase.
Pros:
- Gives the buyer confidence in their investment.
- Highlights negotiating points if earnings are lower than represented.
Cons:
- If issues arise late in due diligence, it can delay or kill the deal.
When the Seller Prepares It (Sell-Side QoE)
- Increasingly popular in competitive sales or when the seller wants to position the business strongly before going to market.
- The seller hires a reputable CPA/M&A advisory firm to prepare the QoE before listing the business.
Pros:
- Helps justify asking price with verified numbers.
- Identifies and fixes issues before buyers discover them.
- Shortens due diligence by providing ready-to-review earnings data.
Cons:
- Upfront cost for the seller, though it often pays for itself in higher offers and faster closings.
🔍 Best Practices for QoE in Business Brokerage
- Use a Reputable Firm – Buyers and lenders give more weight to QoE reports prepared by experienced, independent professionals.
- Start Early – Sellers benefit from addressing potential issues before listing; buyers should start the process immediately after signing the LOI.
- Be Transparent – Full disclosure of adjustments and methodologies builds trust and credibility.
- Integrate with Valuation – A QoE report complements a professional business valuation and makes the numbers defensible.
🤝 The Broker’s Role
At Zeal Business Brokers, we:
- Advise sellers on whether a sell-side QoE would strengthen their position.
- Help buyers understand QoE findings and what they mean for negotiations.
- Coordinate with accounting firms to ensure the report addresses the key issues relevant to the specific business and industry.
✅ Final Thoughts
A Quality of Earnings report is one of the most valuable tools in business sales and M&A. While it’s traditionally a buyer-driven process, sellers who invest in a sell-side QoE can often increase buyer confidence, shorten due diligence, and secure a better price.
Whether you’re buying or selling, having a clear, accurate picture of true earnings is essential for making informed, confident decisions.
Thinking about selling your business? Let’s talk about whether a sell-side QoE could help you present your business in the strongest possible light.