Quality of earnings
An independent accounting analysis that tests whether reported earnings are real, recurring, and sustainable.
Also called: QoE · QofE report
A QoE is not an audit. An audit asks whether the statements comply with accounting standards; a QoE asks whether the earnings a buyer is paying a multiple for will actually repeat. It normalises for one-off items, tests revenue recognition and cut-off, examines the quality and concentration of the customer base, reviews the add-backs line by line, and rebuilds a defensible adjusted EBITDA.
Buyer-side QoE is standard in institutional transactions and increasingly common below that. Sell-side QoE — commissioned by the seller before going to market — is the counterpart, and its value is that it finds the arguments before the buyer does. Add-backs that will not survive scrutiny get dropped when they cost you nothing rather than when they cost you leverage.
It also produces the working capital analysis that sets the peg, and a normalised monthly earnings trend that both sides can negotiate against instead of arguing from annual figures.
Where sellers get caught
- Treating a QoE as a formality. Its adjustments feed directly into price.
- Commissioning one too late to fix anything it finds.
- Assuming a sell-side QoE removes the need for the buyer's. It usually shortens theirs, it does not replace it.
Common questions
Is a sell-side QoE worth the cost?
It depends on deal size and how clean the books are. Where earnings rest on meaningful add-backs or the accounting is informal, finding the weak points yourself is generally the cheaper order of events.
Who does a QoE?
Transaction advisory teams at accounting firms, ranging from national firms to specialist boutiques. The relevant question is how much work they do at your size and in your sector.
Related terms
Adjusted EBITDA
EBITDA restated to remove one-off, non-market, and non-recurring items so the number reflects how the business will run under a new owner.
Add-backs
Expenses added back to reported earnings because they are personal, one-time, or would not exist under a new owner.
Due diligence
The buyer's post-LOI investigation of the business, covering financial, legal, commercial, tax, and operational matters.
Working capital peg
The agreed level of net working capital the business must have at closing, with any shortfall or excess settled in cash afterwards.
Guides that use this term
Where quality of earnings comes up in a real sale, and what it changes.
Last reviewed 2026-08-25. General information for business owners, not legal, tax, or financial advice — terms, thresholds, and tax treatment vary by jurisdiction and by deal.