What is a Quality of Earnings Report and Why It Matters: A Complete Guide for Business Buyers and Sellers
What is a Quality of Earnings Report and Why It Matters
Buying or selling a business isn’t like buying a car. You don’t just check the mileage, kick the tires, and call it a day. When the stakes are in the millions, you want to be absolutely sure the numbers add up—and that they’ll keep adding up after the deal closes.
That’s exactly why a Quality of Earnings report exists.
Think of it as the difference between looking at a selfie and getting a full medical check-up. Financial statements are the selfie—nice snapshot, but not the whole truth. A QoE report is the check-up—it tells you what’s really going on under the hood.
Why the “Quality” in Quality of Earnings Matters
Here’s a story I see all the time.
A buyer falls in love with a business that reports $1 million in annual profit. On the surface, it looks like a dream deal. But after a Quality of Earnings review, we discover that $400,000 of that profit came from a one-time contract that won’t repeat next year.
Suddenly, the “million-dollar” business is really a $600,000 business. That’s a game-changer when you’re writing a check.
So, What Exactly is a Quality of Earnings Report?
In plain English: it’s a deep dive into a company’s financial health.
Instead of just showing what the business made last year, it answers questions like:
- Where did that money actually come from?
- Can those earnings be expected next year—or were they a fluke?
- What’s hiding in the fine print that could trip up a new owner?
It’s not about nitpicking—it’s about painting a realistic picture so buyers and sellers can make smarter decisions.
Who Actually Uses a Quality of Earnings Report?
- Buyers who don’t want to overpay.
- Sellers who want to prove their business is as solid as they say.
- Business brokers (like us) who use QoE reports to build trust and keep deals moving smoothly.
The Audit vs. QoE: Why They’re Not the Same
A lot of owners tell me, “But I already have audited financials. Isn’t that enough?” Not really.
An
audit just checks if your numbers follow accounting rules. A
QoE report digs deeper. It asks, “Are these earnings reliable? Can they be repeated?” That’s what really matters to a buyer.
What’s Inside a Quality of Earnings Report?
Here’s what it usually covers:
- Adjusted EBITDA – cleaning up one-time or unusual expenses.
- Revenue quality – separating recurring income from one-off events.
- Customer concentration – are you relying too much on one or two big accounts?
- Working capital needs – what it really takes to keep the lights on.
- Debt and liabilities – what the buyer might inherit.
- Tax compliance – making sure there are no skeletons in the closet.
Why Sellers Should Care
If you’re a seller, you might be thinking, “This sounds like a buyer’s tool.” But here’s the thing: sellers who get a QoE report done before listing often sell faster and for more money.
Why? Because it shows buyers you’ve got nothing to hide. It’s like selling a house with a clean home inspection already in hand—it just builds trust.
Why Buyers Should Care
For buyers, a QoE report is basically a safety net. It protects you from paying too much, it reveals risks early, and it gives you leverage in negotiations.
In other words, it can save you from one of the most expensive mistakes of your life.
The Process: How Long and How Much?
- Who prepares it? Usually a CPA firm or M&A advisor.
- How long? 2–6 weeks, depending on the size and complexity of the business.
- How much? $20,000–$100,000+.
Yes, it’s an investment. But when you’re dealing with a multimillion-dollar business sale, that investment can save—or make—you far more.
The Red Flags a QoE Report Often Catches
Some of the most common surprises we see:
- Revenue being recorded before it’s earned.
- Hidden liabilities like unpaid taxes or lawsuits.
- Overstated profit margins that won’t last.
- Working capital needs that were swept under the rug.
Why It’s Becoming Standard in the U.S.
With today’s U.S. market—higher interest rates, tighter lending, and cautious buyers—lenders and investors almost expect a QoE report before they’ll move forward. It’s no longer just a “nice to have.” It’s becoming the norm.
Wrapping It Up – Clarity is Everything
Don’t Let Working Capital Ruin a Great Deal
At the end of the day, a Quality of Earnings report gives both buyers and sellers one priceless thing: clarity.
For buyers, it’s peace of mind that you’re not overpaying. For sellers, it’s confidence that you’ll get full credit for the true strength of your business. And for brokers like us, it’s the tool that helps get deals across the finish line.
Ready to Take the Next Step?
If you’re thinking about buying or selling a business in the U.S., don’t leave the outcome to chance. Our team of experienced business brokers at First Choice Business Brokers Phoenix Northwest can help you navigate every step—from valuation to closing—with confidence.
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Schedule a free, confidential consultation today. Let’s talk about your goals and how we can help you make the smartest move possible.
FAQs – Quality of Earnings Reports in Business Sales
1. Is a Quality of Earnings report really necessary when selling a small or mid-sized business?
Yes. More buyers in the U.S. expect QoE reports even for $1M–$10M deals. It reduces surprises, builds trust, and can help you get a stronger valuation.
2. How does a Quality of Earnings report affect business valuation?
It normalizes earnings—separating recurring revenue from one-time events. Buyers and lenders trust those numbers more, which makes for a fairer and more accurate valuation.
3. Who typically pays for the Quality of Earnings report—the buyer or the seller?
Traditionally, the buyer pays. But more savvy sellers are starting to commission their own QoE report before listing. It positions the business as more attractive and can speed up negotiations.
Get in Touch:
First Choice Business Brokerage Phoenix
📍 21640 N 19th Ave Suite C9, Phoenix, AZ 85027
📞 (623) 888-6190
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