Quality of Earnings Reports (QoE)
Sell-side, buy-side and SBA lender-ready QoE reports that show which earnings are real, repeatable and supportable before money changes hands.
The numbers behind the numbers.
Tax returns and internal P&Ls are prepared for different purposes than buying or financing a business. A Quality of Earnings report examines how earnings are produced and adjusts them for owner-related, one-time and non-operating items. The result is a normalized view a buyer, seller or lender can use in their decision.
A QoE is not an audit, though it's often called “audit light.” It is a focused analysis of the areas that tend to move price, terms and financing in a transaction. At OTBC, every QoE is performed or reviewed by a CPA with more than 20 years of audit and accounting experience.
What's typically included
- Revenue quality, trends and cohorts
- Add-backs and one-time items, with support
- Normalized (adjusted) EBITDA and a bridge from reported
- Working capital needs, seasonality and a target peg
- Customer, vendor and margin concentration
- Net debt, debt-like and off-balance-sheet items
- Key KPIs and simple charts
- Executive summary of findings and risks
Built around your side of the deal.
Sell-side QoE
Prepare before going to market. We review presentation, add-backs and trends so you can address questions early and present consistent numbers to buyers.
- Add-back schedule with support
- Adjusted EBITDA bridge
- Data-room checklist
Buy-side QoE
Test the target before you close. We dig into earnings quality, working capital and risks, and flag items worth raising in negotiation or diligence.
- Normalized EBITDA
- Working capital target analysis
- Risk and diligence findings
Lender-ready QoE
A comprehensive report formatted for credit review, including the schedules and cash-flow analysis lenders typically ask for.
- Cash flow and debt service view
- Proof of cash and reconciliations
- Debt and debt-like items
Go deeper where the deal needs it.
Add these procedures when the business or the financing calls for them. Scope is agreed in writing before work begins.
Working capital deep-dive
Normalization, seasonality and target peg calculation.
Revenue quality & cohorts
Concentration, churn, pricing and one-off revenue.
Inventory & COGS
Costing tests, shrink and obsolescence review.
Proof of cash
Tying reported revenue and expenses to bank activity.
Site visit & interviews
On-site walkthrough and management interviews.
Data room setup
Folder structure, naming and diligence checklists.
From scope call to walkthrough.
Scope call
We agree on scope, timing and fee in a written engagement letter.
Data request
A focused list: P&Ls, balance sheets, tax returns, AR/AP agings, payroll, bank statements and key contracts.
Analysis & questions
We test the numbers and work through open questions with management.
Report & walkthrough
Executive summary, supporting schedules, and a walkthrough of what we found.
Common questions
How much does a quality of earnings report cost?
It depends on the size and complexity of the business, the number of entities, how clean the records are, and the scope (sell-side, buy-side or lender-ready). For small and lower-middle-market businesses, fees are commonly in the five figures. We quote a fixed scope in writing after a short call. You can see what's in a typical report in our quality of earnings report example.
Does the SBA require a quality of earnings report?
SBA rules don't require a QoE on every loan, but many SBA lenders ask for one on business acquisitions, especially larger deals. Requirements vary by lender, so ask yours early. With your permission, we can coordinate with your lender on what they need to see.
Quality of earnings vs. due diligence: what's the difference?
Financial due diligence is the broader review a buyer or lender does before a deal. A quality of earnings report is usually its core: the analysis of earnings, adjustments and working capital. Learn about financial due diligence.
Quality of earnings vs. valuation?
A QoE asks what the business actually earns. A valuation asks what those earnings may be worth. Many buyers and sellers use a QoE first so any valuation rests on normalized, tested earnings.
Why get a QoE?
A QoE helps buyers, sellers, investors and lenders understand the earnings a business actually produces, adjusted for owner-related and one-time items. It gives everyone a common, documented starting point for decisions about price, terms and financing.
Quality of earnings report vs. audit: is a QoE an audit?
No, though it's often called “audit light.” An audit is an attest engagement performed by a licensed CPA firm that results in an opinion on whether financial statements follow accounting standards. A QoE is a transaction-focused analysis of sustainable earnings, working capital and debt, and it does not express an audit opinion. OTBC is not a CPA firm, but our CPAs each bring more than 20 years of audit experience, so we know where the numbers tend to break.
What data do you need?
Usually 2–3 years plus the trailing twelve months of P&Ls and balance sheets, tax returns, AR/AP agings, payroll reports, bank statements, and key customer, vendor and lease contracts. We send a tailored list after the scope call.
How long does it take?
Typically 3 weeks to 60 days, depending on scope, the size and complexity of the business, and how quickly information is provided.
Will you talk to my lender?
Yes, with your written permission we can share the report with your lender and answer their questions about our work.
Should a seller get a QoE before going to market?
Many sellers find it useful. A sell-side QoE can surface questions early, while there's still time to gather support or address issues, rather than in the middle of a buyer's diligence.