Quality of Earnings (QoE)

A Quality of Earnings (QoE) report is a financial analysis prepared by an independent accountant or CPA firm on behalf of a buyer during due diligence. It examines the reliability, sustainability, and accuracy of the seller's reported earnings and the normalizing adjustments used to arrive at EBITDA or SDE.

A QoE review typically involves: verifying that revenue is recognized appropriately and consistently, testing the add-backs the seller claims, identifying revenue or expense items that distort the trend of earnings (one-time events, timing differences), assessing working capital adequacy and any seasonal fluctuations, and confirming that the normalized EBITDA figure is a fair representation of sustainable earnings power.

QoE reports are standard in private equity-sponsored transactions and increasingly common in lower middle market deals above $2 million. Costs typically range from $15,000–$75,000 depending on business complexity. A QoE that materially reduces normalized EBITDA frequently triggers purchase price renegotiation.

See also: EBITDA, Add-Back, Normalization, Due Diligence, EBITDA Multiple.