If you are thinking about selling your business, your financials matter more than ever. Buyers want to clearly understand how much revenue and earnings your business generates and whether today’s performance will continue in the future. A Quality of Earnings (QoE) report directly addresses those questions.
A QoE is an independent review of your financial statements and reporting procedures prepared by a third-party accounting firm with transaction advisory expertise. Its purpose is to show what your business truly earns on a normal, ongoing basis. Unlike an audit, which checks whether your books follow accounting rules, a QoE focuses on how reliable and repeatable your profits are. For buyers, it builds confidence. For sellers, it reduces surprises, speeds up the sale process, and helps protect the value of the business.
Key Areas Reviewed in a Sell-Side QoE
- Removing One-Time or Unusual Expenses
Many businesses have costs that happen only once, such as legal fees, relocation expenses, or transaction-related costs. A QoE identifies these items and then mutes their effect from the larger cost equation so buyers can see what the business normally earns year after year. - Adjusting Owner and Related-Party Expenses
In owner-run businesses, personal or discretionary expenses can sometimes run through the company. These may include above-market salaries or business vehicles used for personal purposes. A QoE adjusts for these so the financials reflect what the business would look like under new ownership. - Smoothing Out Ups and Downs
Some businesses have uneven results due to seasonality, project-based billing, or timing issues. Revenue may come in bursts, or expenses may hit all at once. A QoE smooths these fluctuations to show the underlying performance of the business over time. - Making Sure Revenue and Expenses Match
A QoE checks whether revenue and expenses are recorded in the right periods. If income is recorded too early or expenses too late, profits can look better or worse than they really are. Fixing this early prevents buyers from questioning the numbers later. - Reviewing Working Capital
Working capital is the cash needed to run the business day to day—things like accounts receivable, inventory, and payables. Buyers will usually require a certain level of working capital at closing. A QoE helps establish a fair target so you don’t lose money at closing due to misunderstandings. - Reducing Negotiation Issues
Buyers will perform their own financial review during diligence. If they find issues you didn’t address ahead of time, they may ask for a price reduction. A sell-side QoE allows you to address questions early, explain the story clearly, and reduce last-minute renegotiations. - Preparing for Buyer Questions
A QoE acts like a practice run for buyer diligence. It helps management prepare clear answers around:
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- How revenue is earned and when it is appropriately recognized
- Dependence on major clients or customers
- Profit margin variances by product, service, or segment
- Changes in accounting procedures over time
- Cash flow versus reported profits across a given period
- How revenue is earned and when it is appropriately recognized
Being prepared keeps the deal moving and builds buyer confidence. When buyers feel confident in an opportunity, they are willing to invest the time, money, and resources needed for a successful transaction because they know with a high degree of certainty, they can trust the data presented to them.
What a Quality of Earnings Is Not
A QoE is often misunderstood, so it is important to be clear about what it does not do:
- Not an Audit: A QoE is not a formal audit and does not provide an official opinion on accounting compliance or internal controls, though it does review how accounting practices affect earnings.
- Not Advocacy: It is not meant to “spin” the numbers or sell an unrealistic story.
- Not About Inflating Earnings: The goal is not to artificially increase EBITDA, but to present a fair and realistic picture.
A QoE is about credibility and transparency. A strong QoE builds trust and helps buyers feel comfortable moving forward.
Conclusion
A sell-side Quality of Earnings helps you take control of the sale process. It can reduce uncertainty, prevent surprises, and may give buyers confidence in your numbers. When done well, a QoE can lead to smoother negotiations, fewer delays, and a stronger outcome for business owners.
