Here’s a number that should get any seller’s attention. Owners who commissioned their own quality of earnings report before going to market sold at an average of 7.4 times EBITDA, versus 7.0x for those who didn’t, based on GF Data’s analysis of 360 transactions completed since Q3 2024 (reported by ACG’s Middle Market Growth in late 2025). On a $5 million EBITDA business, that gap is roughly $2 million in price.
So what is a quality of earnings report, and why do sophisticated buyers — especially private equity — treat it as the document that decides whether a deal lives or dies? This guide explains what a QoE examines, the difference between sell-side and buy-side versions, and why running your own QoE before you go to market can protect your value and speed your close.
Key Takeaways
- A quality of earnings (QoE) report is an independent analysis that tests whether your reported profit is real, sustainable, and accurately stated — it’s the cornerstone of financial due diligence (Capstone Partners, 2025).
- Sellers who ran a sell-side QoE averaged 7.4x EBITDA versus 7.0x for those who didn’t, across 360 deals since Q3 2024 (GF Data via ACG Middle Market Growth, 2025).
- At least 90% of private-equity-backed deals now use a sell-side QoE, and it’s standard practice for companies with around $5 million or more of EBITDA (ACG Middle Market Growth, 2025).
- A QoE examines adjusted EBITDA, revenue quality, customer concentration, working capital, and one-time items — the same things a buyer will scrutinize anyway.
What is a quality of earnings report?
A quality of earnings report is an independent financial analysis used during due diligence to test whether a company’s reported earnings reflect sustainable operating performance (Anders CPA, 2026). It strips out one-time items and accounting quirks to find the true, recurring profit a buyer would actually inherit. It isn’t an audit — it’s a deep look at whether your earnings are what they claim to be.
Capstone Partners called the QoE “the cornerstone of financial due diligence” in its 2025 commentary. Why does it carry that weight? Price in most deals is a multiple times earnings. If a buyer doubts your earnings figure, every other number moves. The QoE is where that figure gets stress-tested — typically by an independent accounting firm, not the buyer or seller.
What does a quality of earnings report examine?
A QoE focuses on validating EBITDA — adjusting reported earnings to reflect true operating performance after removing non-recurring items (Anders CPA, 2026). But it goes well beyond one number. The analysis typically tests revenue quality, customer and supplier concentration, working capital trends, and the consistency of accounting policies. Each area answers one question: will this profit survive after closing?
The table below breaks down the five areas most QoE engagements scrutinize. Think of it as the buyer’s worry list, written down in advance.
| Area reviewed | What the analyst checks | Why it matters to your deal |
|---|---|---|
| Adjusted / normalized EBITDA | Whether add-backs (owner perks, one-off costs) are legitimate and well-documented | Sets the earnings base your multiple applies to — overstated add-backs get rejected and cut your price |
| Revenue quality & recognition | When and how revenue is booked; whether it’s recurring or one-off; timing vs. cash collection | Predictable, properly recognized revenue supports a higher multiple than lumpy or pulled-forward sales |
| Customer / supplier concentration | Share of revenue or cost tied to a few key accounts | If one client is a large slice of sales, buyers discount for the risk of losing it |
| Working capital | The normal level of cash, receivables, and inventory the business needs to run | Sets the working-capital target in your purchase agreement — get it wrong and money shifts at closing |
| Non-recurring items | One-time legal costs, insurance payouts, COVID-era distortions, related-party deals | Removing these reveals run-rate earnings — both up and down — so the price reflects reality |
Notice that working capital row. A QoE sets the “normal” working capital the business needs, and that target becomes a negotiated term. Set it too high and cash you expected to keep stays in the business — one of the most common places sellers leave money behind when they skip a sell-side review.
Why do private equity buyers require a QoE?
Because their entire model depends on the earnings being real. At least 90% of private-equity-backed deals now use a sell-side QoE, and it’s standard practice for companies around $5 million of EBITDA and up (ACG Middle Market Growth, 2025). A PE buyer borrows against your earnings and plans returns on them. If the number’s soft, their math collapses after they own you.
There’s also a trust dynamic. A buyer’s own QoE — the buy-side version — exists to validate the assumptions behind the purchase price (Anders CPA, 2026). When they find something the seller never disclosed, the deal often re-trades. Renegotiating terms was a top obstacle to closing for 49% of dealmakers, according to KPMG’s 2025 M&A Deal Market Study.
What’s the difference between sell-side and buy-side QoE?
The work is similar; the audience and timing differ. A buy-side QoE is commissioned by the buyer, investor, or lender to validate the price they’re considering (Anders CPA, 2026). A sell-side QoE is run by the owner before going to market — to find problems on their own terms, fix or explain them, and present clean numbers buyers can trust. Same scalpel, different hand on it.
Which one shapes your outcome more? Often the sell-side report, because it changes what buyers see first. Roughly half of lower-middle-market founder-led businesses now commission one (ACG Middle Market Growth, 2025). When you go to market with a credible QoE in hand, buyers spend less time questioning your earnings and more time competing on price — which is the whole point of a well-run M&A advisory process.
How does a sell-side QoE protect your value and speed the deal?
It removes the buyer’s two favorite negotiating tools: surprise and uncertainty. Sellers who ran a sell-side QoE averaged 7.4x EBITDA versus 7.0x without one, across 360 deals since Q3 2024 (GF Data via ACG, 2025). That uplift was clearest on deals above $50 million in value, though benefits often extend down-market through faster, cleaner closings.
Think about what a buyer does when diligence turns up something you didn’t flag. They re-trade — chipping the price or restructuring terms. A sell-side QoE lets you find those issues months ahead and address them before any buyer sees them. You can document add-backs, explain a revenue dip, or normalize working capital on your schedule, not under deadline pressure.
Speed follows from credibility. When your numbers are pre-validated, buyer diligence moves faster and stalls less often. A QoE is one of the most useful steps in preparing your business for sale, and it sits early in any realistic M&A process timeline. Isn’t it better to find the skeleton yourself?
One caution. A QoE supports a valuation; it doesn’t set one. The earnings it confirms still get multiplied by a market multiple that depends on size, sector, and quality. To see how that math works, read our guides on how much your business is worth and EBITDA valuation multiples.
Thinking about a sale in the next year or two and wondering whether a sell-side QoE is worth it for your business? Schedule a confidential consultation with Ivy List Mergers & Acquisitions, a Dallas-based M&A advisory firm, and we’ll talk through when to run one, what it should cover, and how it fits your due-diligence preparation.
Frequently Asked Questions
Is a quality of earnings report the same as an audit?
No. An audit verifies that financial statements comply with accounting standards. A quality of earnings report tests whether your earnings are sustainable and accurately stated for a deal, adjusting EBITDA for one-time items and owner perks (Anders CPA, 2026). Buyers often want a QoE even when audited statements exist.
How much does a quality of earnings report cost?
Costs vary widely by company size, complexity, and scope, so ranges differ. A QoE is typically priced as a fixed professional fee paid to an independent accounting firm, not a percentage of the deal. Given that sell-side users averaged 7.4x EBITDA versus 7.0x (GF Data via ACG, 2025), many owners view it as protection, not just expense.
When should I get a sell-side QoE?
Generally before you go to market — often several months ahead — so findings can inform pre-sale preparation. Running it early gives you time to document add-backs, normalize working capital, and address concentration issues on your own terms. Sell-side QoE is now standard for companies around $5 million of EBITDA (ACG Middle Market Growth, 2025).
Do I need a QoE if my business is small?
It depends on your buyer and deal size. QoE first became standard above roughly $5 million of EBITDA, but advisors increasingly recommend it for businesses with $1 million–$4 million of EBITDA too (ACG Middle Market Growth, 2025). For very small Main Street sales, a lighter financial review may suffice — ask qualified advisors.
Who prepares a quality of earnings report?
An independent accounting or transaction-advisory firm, not the buyer or seller directly. Independence is the point — buyers trust the analysis because a neutral third party performed it (Capstone Partners, 2025). Your M&A advisor typically helps you select the right provider and scope the engagement for your deal.
This article is general educational information, not financial, tax, or legal advice — consult qualified professionals about your situation.
Sources
- ACG Middle Market Growth (Katie Maloney), Why More Sellers Are Using Quality of Earnings Reports for M&A Deals (GF Data analysis, 360 deals since Q3 2024; 7.4x vs 7.0x; 90% of PE-backed deals), retrieved 2026-06-18 — https://middlemarketgrowth.org/fall-2025-gf-data-quality-of-earnings-reports/
- Anders CPA, Quality of Earnings (QoE) Report: What It Is and Why It Matters in M&A, retrieved 2026-06-18 — https://anderscpa.com/learn/blog/quality-of-earnings-report-analysis-due-diligence-guide/
- Capstone Partners, Getting the Most from a Quality of Earnings (QofE) Review, retrieved 2026-06-18 — https://www.capstonepartners.com/insights/article-getting-the-most-from-quality-of-earnings-qofe-review/
- KPMG, 2025 M&A Deal Market Study (top obstacles to closing; renegotiation pressure 49%), retrieved 2026-06-18 — https://kpmg.com/us/en/articles/2025/2025-ma-deal-market-study.html