If you’re preparing to sell your business, a Quality of Earnings (QoE) report is one of the most useful tools available. It gives buyers, investors, and advisors a clearer understanding of how much of your company’s earnings are tied to ongoing operations versus one-time events or accounting choices.
A quality of earnings report helps reduce friction in the transaction process by giving all parties greater confidence in the numbers and allowing the seller to maintain more control.
How a Quality of Earnings Report Differs from an Audit
A financial audit confirms that your books are accurate according to standard accounting rules. While this is important, it may not give potential buyers the information they really need. A quality of earnings report goes further by focusing on the economic reality behind the numbers.
Buyers want to know whether your earnings are sustainable – not just reported correctly. A QoE report addresses this by breaking out recurring versus nonrecurring revenue, identifying discretionary or unusual expenses, and normalizing EBITDA. These insights help both buyers and sellers make better-informed decisions.
What’s Included in a Quality of Earnings Report?
Each report is tailored to the specifics of the business and the transaction, but most QoE reports cover:
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Historical revenue and margin trends
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Adjustments to earnings for nonrecurring or owner-specific items
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Working capital requirements
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EBITDA normalization
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Identification of red flags or financial inconsistencies
A well-prepared report gives a more accurate view of profitability and helps clarify what is actually driving earnings.
Who Requests a Quality of Earnings Report?
Typically, the buyer requests a QoE report and engages an outside firm to prepare it. However, sellers are increasingly commissioning their own reports in advance.
By taking this proactive step, sellers can identify and resolve potential issues early, clarify earnings with their advisor, and reduce surprises once the buyer starts due diligence.
Why Seller-Prepared Reports Are Becoming More Common
There is a growing trend of sellers preparing QoE reports before bringing a company to market. Doing so allows the seller to anticipate buyer concerns, organize financials, and avoid delays later in the process.
This shift is becoming more common because seller-prepared reports lead to:
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Faster due diligence
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Fewer surprises
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More confident deal execution
We believe this will soon become standard in most private company sales.
How New Life CFO Supports the Process
At New Life CFO, we help business owners get ready for the quality of earnings review – long before the buyer gets involved. Our fractional CFOs support you with financial clean-up, documentation, and normalization to ensure your numbers are accurate, defensible, and ready for scrutiny.
To learn more, visit our page on fractional CFO services.
Frequently Asked Questions
What is the purpose of a quality of earnings report?
To separate core, recurring earnings from one-time items so buyers can assess the true performance of the business.
Who usually prepares a quality of earnings report?
Typically the buyer, but sellers increasingly prepare their own to gain an advantage.
Is a quality of earnings report the same as an audit?
No. An audit confirms accuracy, while a QoE report focuses on the sustainability and reliability of earnings.
