What Is a Quality of Earnings Report and Do I Need One?
A Quality of Earnings (QoE) report is a financial analysis performed by an independent accounting firm that examines and validates your business’s reported earnings. While traditionally commissioned by buyers, more sellers are now proactively investing in seller-side QoE reports — and for good reason.
What Does a Quality of Earnings Report Include?
A QoE report typically examines: the sustainability of your revenue, the accuracy of your reported EBITDA, the validity of add-backs and adjustments, working capital trends, and any accounting policies that may make earnings appear higher or lower than they truly are. It’s a more in-depth analysis than a standard audit.
Why Buyers Value QoE Reports
Buyers (and their lenders) use QoE reports to confirm that the earnings they’re paying a multiple on are real and sustainable. A deal based on $800,000 of EBITDA that a QoE report confirms is actually $650,000 in adjusted earnings can fall apart or require significant renegotiation. Buyers who commission their own QoE report will do this analysis regardless — the question is whether they find surprises.
Should Sellers Commission a QoE Report?
A seller-side QoE report makes sense when your business has complex financials or significant owner add-backs that need explanation, you’re selling a business valued above $2–3 million where a QoE is expected by buyers, you want to move through due diligence faster and with fewer surprises, or you’ve made significant investments that temporarily reduced earnings.
What Does a QoE Report Cost?
Seller-side QoE reports typically cost $10,000–$50,000 depending on business complexity. For businesses valued above $2 million, this investment can more than pay for itself by preventing downward price adjustments or deal failures during due diligence.
I help business owners in Northeast Florida evaluate whether a QoE report makes sense for their sale and connect them with the right accounting resources. Contact Ryan C. Winter for guidance.
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