Quality of Earnings Report: A Seller's Guide
A QoE report is the document that either validates your EBITDA or quietly picks it apart. For deals above $5M, buyers and their lenders will commission one regardless. Here's what it covers — and why more sellers are paying for their own before a process begins.
Key Takeaways
- ✓A QoE report independently validates Adjusted EBITDA and revenue quality
- ✓Sell-side QoEs (commissioned by the seller) reduce diligence surprises
- ✓Buyers and their lenders typically require a buy-side QoE for deals above $5M
- ✓A clean QoE accelerates the diligence phase and builds buyer confidence
In this guide
1What a QoE report actually covers
A Quality of Earnings report is prepared by an independent accounting firm and analyzes the financial performance of a business in depth. Key areas covered:
EBITDA analysis: Reconstructing EBITDA from financial statements, identifying and evaluating add-backs, and assessing whether they are one-time or recurring.
Revenue quality: Analyzing revenue by customer, contract type, and trend. Identifying concentration issues and revenue at risk.
Working capital: Analyzing the historical working capital of the business to establish an appropriate benchmark for deal negotiations.
Balance sheet review: Identifying any off-balance-sheet liabilities, contingent liabilities, or assets that affect deal value.
2Sell-side vs. buy-side QoE
Buy-side QoE: Commissioned by the buyer (or their lender) during due diligence. Standard for deals above $5M. The buyer's accounting firm scrutinizes the seller's financials independently.
Sell-side QoE: Commissioned by the seller before launching the process. Less common but increasingly popular because it surfaces issues before buyers do — allowing sellers to address them proactively.
A clean sell-side QoE shared with buyers in the data room signals that the seller has done the work, accelerates buyer diligence, and reduces the risk of last-minute price renegotiation.
A sell-side QoE costs $15,000-$40,000 depending on business complexity. For a deal in the $10M-$30M range, it often pays for itself by reducing buyer diligence surprises that would otherwise result in price adjustments.
3What QoE findings typically affect
The most common QoE findings that change deal outcomes:
Add-back challenges: The buyer's QoE may disallow some of the seller's claimed add-backs, effectively reducing Adjusted EBITDA and therefore the purchase price.
Revenue normalization: One-time revenue spikes or revenue from customers who have since churned may be adjusted out of the trailing 12-month figures.
Working capital adjustment: The working capital peg established in the LOI is often adjusted based on QoE findings, affecting the final equity check at close.
Understanding these potential adjustment points before a process helps sellers prepare documentation and explanations that hold up under scrutiny.
Prepare Clean, Defensible Financials Before a Process
AIVI's diagnostic assessment helps advisors identify financial preparation gaps before a QoE or buyer diligence surfaces them.
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