What Is a Quality of Earnings Report?

A quality of earnings (QoE) report is an analytical document prepared by an independent accounting firm that examines whether a company's reported earnings accurately reflect its true, sustainable economic performance. It is not an audit. An audit tests whether financial statements conform to generally accepted accounting principles (GAAP); a quality of earnings report tests whether those numbers are meaningful. The two questions are related but distinct, and in M&A transactions, it is the second question that determines whether the deal price is defensible.

What a QoE Report Examines

The core focus of a quality of earnings analysis is EBITDA normalization. The report scrutinizes every line of the income statement and asks whether the revenues and expenses it reflects represent what the business will look like post-closing, under new ownership, managed for sustainable profitability. Non-recurring items are identified and removed: one-time insurance proceeds, unusual legal settlements, a gain on the sale of equipment, a temporary uptick in revenue from a customer that has since churned. Owner-specific items are adjusted: above- or below-market owner compensation, personal expenses run through the business, related-party transactions at off-market terms. The result is a "normalized EBITDA" figure that the acquirer can confidently use as the basis for their purchase price multiple.

Beyond earnings normalization, a thorough QoE report also examines revenue quality in detail. Not all revenue is equally valuable. Recurring subscription revenue from long-term contracts is worth more than one-time project revenue from new relationships. Revenue that is highly concentrated in one or two customers carries risk. Revenue recognized before delivery creates future liability. A QoE report maps the composition of revenue by type, customer, geography, and contract structure, and surfaces trends that may not be visible from the headline number alone.

When a QoE Report Is Required

Quality of earnings reports are standard practice in private equity acquisitions and are increasingly common in strategic M&A transactions, particularly those where the acquisition price exceeds $5 million. Private equity firms almost universally commission a QoE as part of their buy-side due diligence process, because the normalized EBITDA in the QoE report directly determines how much they are willing to pay. A deal priced at "7x EBITDA" is only meaningful if the EBITDA is defensible, and a QoE report provides that defense.

Sellers can also commission a sell-side QoE in advance of going to market. This is increasingly common among prepared sellers because it accelerates the due diligence process, surfaces issues that can be corrected before they are discovered by a buyer, and signals to potential acquirers that management is organized and transparent. A clean sell-side QoE shortens deal timelines, reduces re-trading risk, and often supports a higher final price by giving buyers the confidence to move quickly without demanding heavy representations and warranties. For business owners who have worked with OneTriad on a pre-transaction valuation, the financial normalization work done in that process is directly applicable to a sell-side QoE, making the transition to market significantly more efficient.