What is a QoE report?
A quality of earnings (QoE) report is an independent financial analysis, typically commissioned by the buyer during due diligence, that scrutinizes the accuracy and sustainability of a target company's reported earnings. It's more granular than a standard audit. The goal isn't just confirming the numbers are accurate, but understanding which parts of earnings are real, recurring, and likely to continue after closing.
A QoE report frequently adjusts reported EBITDA, sometimes up, often down. Since price is typically a multiple of EBITDA, even a modest adjustment can move final price by a meaningful amount. Sellers who understand this ahead of time negotiate from a stronger position.
Why buyers commission a QoE
Buyers, especially private equity and institutional acquirers, use QoE reports to validate the earnings figure the entire deal is priced against, identify risks not visible in standard financials, and support post-closing purchase price adjustments if the numbers don't hold up. It's standard practice on almost any deal above roughly $10M, and increasingly common below that threshold too.
Common EBITDA adjustments
| Adjustment Type | Direction | Example |
|---|---|---|
| Owner compensation normalization | Usually up | Above-market owner salary is added back to reflect market-rate replacement cost. |
| One-time expenses | Usually up | Legal settlements, relocation costs, or other non-recurring items are excluded. |
| Related-party transactions | Either direction | Above- or below-market rent paid to an owner-affiliated entity is adjusted to market rate. |
| Revenue quality issues | Usually down | Revenue pulled forward, one-time contracts, or customer concentration risk not reflected in reported figures. |
| Deferred maintenance / capex | Usually down | Underinvestment in equipment or infrastructure that will require near-term spending. |
How adjustments affect price
Because price is typically set as a multiple of EBITDA, an adjustment doesn't just move the price by its own dollar amount, it moves it by that amount times the multiple. A $500,000 downward EBITDA adjustment at a 6x multiple represents a $3M swing in headline price, which is why QoE findings are frequently a central point of LOI renegotiation.
This is also why sellers benefit from commissioning their own sell-side QoE before going to market, surfacing and explaining issues on your own terms, rather than reacting to a buyer's findings under time pressure.
Preparing before you sell
- 01
Document every add-back as it happens
Don't wait until diligence to reconstruct why a given expense was personal or one-time, contemporaneous documentation is far more credible than after-the-fact explanation.
- 02
Separate personal and business expenses cleanly
Common in owner-operated businesses, but the cleaner the separation going in, the less friction during diligence.
- 03
Consider a sell-side QoE
For larger deals especially, commissioning your own QoE ahead of marketing can control the narrative around adjustments rather than leaving it entirely to the buyer's team.
- 04
Get comfortable defending your numbers
Be ready to explain the business rationale, not just the accounting, behind every significant add-back or adjustment a buyer's team will ask about.