Sell a Business

Quality of Earnings: What QoE Analysts Find in Your Books

TL;DR: A quality of earnings (QoE) review is the buyer’s forensic look at whether your EBITDA is real, repeatable, and correctly stated. It is not an audit: it works monthly instead of annually, targets adjusted EBITDA instead of GAAP net income, and typically runs four to six weeks. Analysts test proof of cash, revenue recognition, add-backs, customer concentration, and working capital trends. Sellers who prepare, with monthly closes, documented add-backs, and clean revenue detail, turn the QoE from a re-trade weapon into a confirmation exercise.

Somewhere between your signed letter of intent and your closing, a team of accountants you did not hire will spend a month inside your books. Their job is to tell the buyer whether the earnings you sold them are real. What they find, and how well you anticipated it, has more influence on your final price than almost anything else that happens after the LOI.

After fifteen years of walking sellers through buyer diligence, I can tell you the QoE is where prepared sellers keep their price and unprepared sellers lose it. Here is what the analysts actually test, what the process costs and takes, and how to get ready before they arrive.

Key Takeaways

A QoE review targets adjusted EBITDA and its sustainability; an audit targets GAAP net income. They answer different questions.

Typical timeline is four to six weeks, and the seller’s response speed is the biggest variable.

Analysts focus on proof of cash, revenue recognition, add-back support, customer concentration, and working capital trends.

About 31% of sell-side engagements end without a transaction, led by valuation gaps (Pepperdine, 2025); diligence surprises are how gaps open late.

PE-backed sellers almost always run their own sell-side QoE (about 90%); founder-led sellers do about half the time (GF Data, 2025).

What is a quality of earnings report?

A quality of earnings report is a transaction-focused analysis of how sustainable and accurately stated a company’s earnings are, built around adjusted EBITDA rather than net income. Unlike an audit, it is not governed by a prescribed attestation standard; it is a consulting engagement whose scope follows deal risk (Stout, 2024; Anders CPA, 2026).

The practical differences from your annual audit or review matter to a seller:

Different target: an audit opines on whether GAAP financial statements are fairly stated. A QoE asks whether the EBITDA the price is based on will still be there next year.
Different granularity: QoE analysts work monthly, over the trailing twelve months and usually two to three prior years, because monthly patterns expose what annual totals hide.
Different posture: the buy-side QoE team works for the buyer. Every finding that lowers adjusted EBITDA is, functionally, a negotiating exhibit.

That last point is why an audit does not protect you here. Plenty of sellers with clean audit opinions have watched a QoE team carve six figures out of adjusted EBITDA using information the audit never looked at.

Citation capsule: A quality of earnings review is a transaction-specific analysis of adjusted EBITDA and its sustainability, performed at monthly granularity over the trailing twelve months and prior years. It differs from an audit in target (adjusted EBITDA vs. GAAP net income), granularity (monthly vs. annual), and governing framework (consulting engagement vs. attestation standards) (Stout, 2024; Anders CPA, 2026).

What QoE analysts actually test

QoE scope varies by deal, but five tests appear in nearly every engagement, and they are where price adjustments come from (Anders CPA, 2026; The Bonadio Group, 2024):

Proof of cash. Reported revenue and expenses are tied to actual bank activity, month by month. Gaps between the books and the bank are the fastest way to lose credibility.
Revenue recognition and cutoff. When you book revenue versus when you earn it: upfront-billed service contracts, deferred revenue, percentage-of-completion jobs, and end-of-period cutoff all get rebuilt.
Add-back scrutiny. Every owner add-back gets tested against documentation. Owner compensation is restated to market (a $500,000 owner salary might be adjusted to a $250,000 market rate), personal expenses need receipts, and related-party rent gets marked to market.
Customer concentration and revenue durability. Revenue by customer over three years, churn, and contract terms, because a customer who is 30% of revenue is a pricing discussion waiting to happen.
Working capital trends. Monthly working capital over the trailing year, which becomes the basis for the working capital peg you will negotiate in the purchase agreement.

Analysts will also interview management, often asking the same question more than once in different forms. That is the method, not rudeness: inconsistent answers get tested harder.

What a QoE costs and how long it takes

Expect four to six weeks from kickoff to final report, with your own responsiveness as the biggest schedule driver. Published market guides put costs at roughly $6,000 to $25,000 for smaller deals and $25,000 to $75,000 or more for typical lower-middle-market engagements, scaling with company complexity (DueDilio, 2025; True North M&A, 2025).

The document request that starts the clock is predictable: three to five years of financial statements and tax returns, current-year interims, bank statements, debt agreements, revenue by customer, and the support behind every add-back. Sellers who have that package staged before the LOI, which is part of what we build during sale preparation, routinely cut weeks off the timeline.

Why the QoE matters: deals die in diligence

The stakes are not abstract. About 31% of sell-side engagements end without a transaction, and the single largest killer is a valuation gap between seller expectations and what the market, after diligence, will actually pay (26% of failed engagements). Where pricing was the issue, roughly 84% of the gaps were 11% to 30% wide (Pepperdine Private Capital Markets Report, 2025).

Here is the mechanism: the LOI price is built on the EBITDA you presented. If the buyer’s QoE team cuts that number 15% in week four of exclusivity, the buyer does not walk away; they re-trade, and you have no competing bidders left to defend you. The valuation gap that kills deals is very often born in a QoE finding the seller could have anticipated.

This is why sell-side QoE reviews, commissioned by the seller before going to market, have spread: they validate adjusted EBITDA independently, surface red flags while there is still time to fix them, and smooth the working capital negotiation (Withum, 2025). Around 90% of PE-backed sellers commission one, versus about half of founder-led businesses; sell-side QoE deals since late 2024 averaged 7.4x EBITDA versus 7.0x without, though that premium concentrates in deals above $50M (GF Data, 360 transactions, 2025). For a typical Gulf South seller, the honest case for a sell-side QoE is speed, fewer surprises, and a price that survives diligence rather than a bigger multiple. Practitioners in the same study put it plainly: it makes the deal move faster the overwhelming majority of the time. Whether it is worth the fee for your size of company is a case-by-case call we make during preparation, ideally three to six months before going to market (Middle Market Growth, 2025).

Citation capsule: About 31% of sell-side engagements end with no transaction, led by valuation gaps (26%), and 84% of fatal pricing gaps were 11-30% wide (Pepperdine, 2025). Roughly 90% of PE-backed sellers commission a sell-side QoE versus about 50% of founder-led sellers; the measured multiple premium (7.4x vs 7.0x) concentrates above $50M enterprise value, so for smaller deals the payoff is speed and re-trade prevention (GF Data via Middle Market Growth, 2025).

How to prepare before the analysts arrive

Preparation is mostly about making your numbers reconstructable by a stranger. The sellers who sail through QoE reviews have these habits in place well before the LOI:

Close your books monthly, on accrual or with a clean cash-to-accrual bridge, so monthly EBITDA is a real number rather than a year-end allocation.
Build the add-back file now: every adjustment gets a document. Market comp data, receipts, lease comparisons, settlement papers. An undocumented add-back is a price reduction wearing a disguise.
Stage the standard request list: three to five years of statements and returns, bank statements, debt agreements, and interims in one organized data room.
Know your revenue by customer for three years, including churn and contract terms, before the buyer computes it for you.
Schedule deferred revenue and inventory honestly: upfront-billed contracts and stale inventory are two of the most common EBITDA adjustments (The Bonadio Group, 2024).

All of this is standard workstream in our engagements, alongside recasting your financials to a defensible standard before any buyer sees them, and it feeds directly into the LOI negotiation, where diligence terms and exclusivity get set.

The panicked CFO and the file we already had

A standard part of our recasting process is that we make every client itemize their add-backs and connect them to the general ledger, down to the penny. Not a summary schedule: a line-by-line file that ties each adjustment to the specific ledger entries behind it, with the same explanation we use in the recast financials and the confidential information memorandum (CIM). It is tedious work months before a buyer exists, and sellers occasionally ask why we insist on it.

A recent large bank-financed transaction answered that question. The analyst performing the bank’s required valuation sent over a detailed request for the support behind the numbers, and the company’s CFO called me in a panic. I reminded her that this was exactly why we did that work on the front end: we could hand the analyst a file that directly linked each and every expense to the general ledger, with the explanations we had already used in the financials in the CIM. She was relieved, and the package went out without a scramble.

When I spoke with the valuation analyst on the phone, they were genuinely excited, because we had made their job a whole lot easier. An analyst who can trace every adjustment straight to the ledger stops probing and starts confirming.

That is the lesson: preparing these things in advance saves crucial time when you are deep in the process, when exclusivity is running and every unanswered request stretches the timeline. (Identifying details have been changed to protect confidentiality.)

FAQ

What is the difference between a quality of earnings report and an audit?

An audit opines on whether GAAP financial statements are fairly stated, annually. A QoE analyzes whether adjusted EBITDA is accurate and sustainable for a transaction, monthly, with no prescribed attestation standard. A clean audit does not prevent a QoE team from adjusting your EBITDA downward.

How much does a QoE cost for a lower-middle-market business?

Published market guides suggest roughly $6,000 to $25,000 for smaller deals and $25,000 to $75,000 or more for typical lower-middle-market engagements, depending on complexity, entity count, and revenue model (DueDilio, 2025; True North M&A, 2025). The buyer pays for the buy-side QoE; a sell-side QoE is the seller’s investment.

How long does a QoE take, and can it delay my closing?

Typically four to six weeks. The biggest variable is how fast the seller produces documents and answers. A staged data room and monthly closes keep the QoE inside the deal timeline; scrambling for records is how exclusivity periods get extended, and extended exclusivity favors the buyer.

Will the buyer’s QoE accept my add-backs?

Only the documented ones. Owner compensation gets restated to market, personal expenses need receipts, related-party leases get marked to market rent, and one-time items need proof they are truly non-recurring. Unsupported add-backs are reversed, and each reversal multiplies into the price.

Should I get my own sell-side QoE before going to market?

About 90% of PE-backed sellers do, versus roughly half of founder-led sellers (GF Data, 2025). Below $50M in enterprise value the data shows the payoff is speed and fewer re-trades rather than a higher multiple, so it is a case-by-case decision based on your size, complexity, and how clean your books already are.

What documents will the QoE analysts ask for?

Three to five years of financial statements and tax returns, current interims, bank statements, debt agreements, revenue by customer, working capital detail, and support for every add-back. Expect management interviews as well, often revisiting the same questions from different angles.

Conclusion: study for the exam before the LOI

The QoE is the moment your marketed EBITDA meets an adversarial reader. You cannot skip it, but you can decide whether it confirms your number or rewrites it, and that decision gets made months earlier, in how you close your books and document your adjustments.

Getting sellers to that prepared position is the core of our process, and it starts with knowing what your recast earnings actually support. If you want your numbers pressure-tested by our team before a buyer’s team does it for you, book a consultation.

Joel F. Duran has 15+ years of M&A and business brokerage experience and holds the CM&AA, M&AMI, CM&AP, CEPA, CVGA, CVB, CAIM, and CMSBB designations. Duran Advisors serves upper Main Street and lower middle market businesses across the Gulf South, including New Orleans Metro, the North Shore, Baton Rouge, Houma-Thibodaux, and South Mississippi. Client examples in this article are anonymized to protect confidentiality.

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Sources

Stout, Biggest Differences Between a QoE Assessment and an Audit (Jul 2024). https://www.stout.com/en/insights/article/biggest-differences-between-qoe-assessment-and-audit
Anders CPA, Quality of Earnings Report Analysis: A Due Diligence Guide (Feb 2026). https://anderscpa.com/learn/blog/quality-of-earnings-report-analysis-due-diligence-guide/
The Bonadio Group, Common QoE Adjustments (Nov 2024). https://www.bonadio.com/article/common-qoe-adjustments/
Pepperdine Graziadio Business School, 2025 Private Capital Markets Report (2025). https://digitalcommons.pepperdine.edu/gsbm_pcm_pcmr/18/
Middle Market Growth (ACG), Why More Sellers Are Using Quality of Earnings Reports, GF Data analysis (Dec 2025). https://middlemarketgrowth.org/fall-2025-gf-data-quality-of-earnings-reports/
Withum, The Strategic Edge: Why a Sell-Side QoE Report Is Essential in M&A Transactions (Jun 2025). https://www.withum.com/resources/the-strategic-edge-why-a-sell-side-quality-of-earnings-qoe-report-is-essential-in-ma-transactions/
DueDilio, Quality of Earnings Analysis Guide (2025). https://www.duedilio.com/quality-of-earnings-analysis-guide-2025/
True North M&A, Sell-Side Quality of Earnings Report Guide (Aug 2025). https://www.tnma.com/blog/sell-side-quality-of-earnings-report-guide/