Quality of Earnings Reports: What They Are and How Buyers Use Them

Q: Is a QoE required for SBA loans?

The SBA itself does not mandate a quality of earnings report by that name. However, SBA 7(a) lenders routinely require an independent business valuation for acquisitions above $500,000 involving goodwill, and many lenders require or strongly encourage a QoE when the purchase price is based primarily on adjusted EBITDA or seller's discretionary earnings. In practice, lenders underwriting SBA acquisition loans want confidence that the earnings number used to calculate debt service coverage is real and sustainable. A QoE provides that confidence in a way that seller-prepared financials alone cannot. Buyers using SBA financing should expect their lender to ask for a QoE on any transaction above $1-2M.

Q: Is a QoE the same as an audit?

No. A quality of earnings report and an audit are different in scope, purpose, and what they provide. An audit is a formal attestation engagement governed by Generally Accepted Auditing Standards (GAAS). The auditor expresses an opinion on whether financial statements are presented fairly, in all material respects, in conformity with GAAP. A QoE is an agreed-upon procedures engagement focused on the specific questions a buyer needs answered: Is this EBITDA number real? Are the addbacks legitimate? Is revenue sustainable? A QoE does not result in an opinion on the financial statements. It is a deal-focused analysis, not an attestation product.

Q: Should a seller get their own QoE before going to market?

Yes, in most cases. A sell-side QoE helps the seller control the narrative. Rather than waiting for a buyer's QoE to surface issues mid-deal, a seller who has already commissioned a QoE can address findings proactively, prepare explanations for unusual items, and enter negotiations with a defensible earnings number. A seller-side QoE also signals process sophistication to buyers and tends to accelerate deal timelines because the buyer may rely on the existing QoE rather than delaying closing to commission a new one. The cost of a sell-side QoE is typically recoverable if it helps the seller avoid a price chip during due diligence or shortens the deal timeline.

In private company M&A, the purchase price is almost always derived from a multiple of earnings. A buyer agrees to pay five or six times EBITDA, or three times seller's discretionary earnings, based on the financial picture the seller presents. The fundamental risk in any acquisition is that the earnings number is wrong: overstated through aggressive addbacks, inflated by one-time revenue, masked by deferred expenses, or simply misrepresented.

The quality of earnings report (QoE) is the mechanism buyers and their lenders use to verify that the earnings number is real before committing to the purchase price. It is commissioned during due diligence, prepared by an independent accounting firm, and used to validate or challenge the seller's adjusted earnings figure. When the QoE finds problems, buyers use the findings to renegotiate the price, restructure the deal, or walk away. When the QoE confirms the seller's numbers, it gives the buyer and lender the confidence to close.

This article is part of the financing cluster anchored by the complete guide to financing a business acquisition. It covers what a QoE actually contains, how buyers and lenders use the findings, and what happens when the numbers shift during due diligence. For the broader transaction process, the complete guide to buying a business provides that context.

If you are still oriented to the valuation side, the SDE vs EBITDA guide explains the earnings metrics the QoE is analyzing, and the business valuation guide covers how multiples are applied to reach the purchase price.

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What a Quality of Earnings Report Actually Covers

A quality of earnings report is a financial analysis prepared by an independent accounting firm that examines the sustainability and accuracy of a business's reported earnings. The scope is agreed between the buyer and the QoE firm at engagement, but most buy-side QoE reports cover a core set of topics: normalizing adjustments, revenue quality, working capital analysis, and balance sheet review.

The QoE is not a verification of every transaction in the general ledger. It is a targeted analysis focused on the specific questions a buyer needs answered to close the deal with confidence. Those questions generally are: Is the adjusted EBITDA or SDE the seller is representing achievable by a new owner? Is revenue growing, stable, or declining when normalized? Are the addbacks the seller has claimed legitimate? Is working capital at a normal level, or has the seller been managing the balance sheet in anticipation of the sale?

Core Sections of a Buy-Side QoE

1. Earnings bridge: A waterfall from reported net income to adjusted EBITDA or SDE, showing each addback and the QoE firm's assessment of whether it is supportable.

2. Revenue analysis: Breakdown of revenue by customer, product line, geography, and contract type, with trend analysis over the trailing two to three years.

3. Expense analysis: Identification of unusual or one-time expenses, owner-related costs that will not transfer, and any expenses that may have been deferred or understated in the periods under review.

4. Working capital analysis: Monthly working capital over the trailing twelve to twenty-four months, identification of seasonal patterns, and assessment of whether the closing balance sheet reflects normalized operating levels.

5. Balance sheet review: Examination of material balance sheet items for completeness and accuracy, including receivable collectability, inventory valuation, and accrual adequacy.

The output is a written report that presents findings, identifies risks, and often includes an adjusted earnings figure that reflects the QoE firm's independent assessment of what the business actually earns on a normalized, ongoing basis. This figure becomes the anchor for renegotiation if it differs materially from what the seller represented. For the full due diligence context in which the QoE sits, the M&A due diligence guide covers all the workstreams that run alongside a QoE.

QoE vs Audit vs Review: What the Differences Mean

Buyers who are new to M&A sometimes conflate QoE reports with audits, or assume that a seller's audited financials eliminate the need for a QoE. These are different products serving different purposes, and understanding the distinction matters.

Audit: A formal attestation engagement governed by Generally Accepted Auditing Standards (GAAS). The auditor expresses an opinion on whether financial statements are presented fairly, in all material respects, in conformity with GAAP. Audited financials provide the highest level of assurance that the reported numbers conform to accounting standards. They do not, however, tell you whether GAAP-compliant revenue is recurring, whether reported EBITDA includes owner addbacks that a new owner cannot replicate, or whether the business can sustain its earnings under new ownership. An audit answers "are these numbers accurate per GAAP?" A QoE answers "are these numbers meaningful for a buyer?"

Review: A limited assurance engagement where the accountant performs analytical procedures and inquiries but does not perform the detailed testing required in an audit. The accountant provides negative assurance: they are not aware of material modifications needed. Reviews are less expensive and less thorough than audits. They are common in smaller businesses that need some external financial credibility without the cost of a full audit. A review does not provide the same foundation as an audit, and it does not address the deal-specific questions a QoE is designed to answer.

Quality of Earnings Report: An agreed-upon procedures engagement focused entirely on the buyer's due diligence questions. The QoE firm performs the procedures agreed to in the engagement letter and reports findings. There is no opinion, no attestation, and no assurance. The QoE is a transaction advisory product, not an audit product. It can be done quickly, scoped to the buyer's specific concerns, and produced in a format that directly informs deal negotiations. Even when a seller has audited financials, buyers in material acquisitions typically commission a QoE because the QoE addresses questions an audit does not ask.

Common mistake: Buyers who accept audited financial statements as a substitute for a QoE are solving the wrong problem. Audited statements confirm accounting compliance. They do not validate the addbacks, confirm revenue sustainability, or identify balance sheet risks that are material to the purchase price negotiation.

Who Typically Orders a QoE (Buyer vs Seller-Side)

There are two primary contexts in which a QoE is commissioned: the buy-side QoE ordered by the buyer during due diligence, and the sell-side QoE ordered by the seller before going to market. Understanding the difference helps both parties navigate the due diligence process efficiently.

The buy-side QoE is the traditional model. The buyer hires a QoE firm after the LOI is signed and the due diligence period begins. The buyer controls the scope, the QoE firm reports to the buyer, and the findings are confidential to the buyer (unless shared with the lender). The buyer pays for the QoE as part of their diligence costs. This model gives the buyer independence and ensures the QoE answers their specific questions without any seller influence on scope or framing.

The sell-side QoE is commissioned by the seller, typically when the seller is running a formal sale process or working with an M&A advisor. The seller pays for the QoE before engaging buyers, packages the QoE report as part of the marketing materials, and shares it with prospective buyers during the due diligence phase. The sell-side QoE helps the seller control the narrative, reduce the time buyers need to commission their own QoE, and signal that the business can withstand external financial scrutiny.

Buy-Side vs Sell-Side QoE: Key Differences

Factor	Buy-Side QoE	Sell-Side QoE
Who commissions	Buyer	Seller
Who pays	Buyer	Seller
Timing	After LOI, during due diligence	Before going to market
Scope control	Buyer-directed	Seller-directed
Buyer reliance	Direct (their own report)	Indirect (buyer must assess seller's QoE independence)
Typical outcome	Basis for price chip or confirmation	Reduces buyer diligence timeline

Whether a buyer accepts a seller-side QoE depends on the reputation of the QoE firm, the completeness of the work, and whether the buyer's lender will rely on it. Many SBA lenders require their own approved independent review and will not accept a seller-commissioned QoE. Buyers should confirm with their lender early what due diligence work product is acceptable.

Normalizing Adjustments: The Core of the QoE

The most consequential section of any QoE is the analysis of normalizing adjustments, also called addbacks. These are items the seller adds back to reported net income or EBITDA to arrive at an adjusted earnings figure that is supposed to represent the business's true earning power for a new owner.

Adjustments fall into two categories. The first is legitimate: a one-time legal settlement, a non-recurring consulting project, the owner's above-market compensation that a salaried replacement would not cost. These items genuinely distort the reported earnings relative to what the business would generate on an ongoing basis, and adding them back produces a more accurate picture of normalized earnings. The second category is less defensible: recurring expenses that happen to be labeled as one-time, personal expenses run through the business that are operational, revenue pulled forward to inflate one period at the expense of another.

The QoE firm examines each addback the seller has claimed and assesses whether it is supportable. For each item, the firm will typically request the underlying documentation, assess whether the item is genuinely non-recurring, and determine whether the proposed addback amount is accurate. Addbacks that the QoE does not accept reduce the adjusted earnings figure and, by extension, the defensible purchase price.

Owner compensation adjustments: The most common addback in small business acquisitions. If the owner pays himself $300,000 and a market-rate replacement would cost $120,000, the $180,000 difference is an addback. The QoE firm will assess whether the compensation figure is actually above market, what a comparable replacement would cost, and whether the owner's role is fully replaceable or whether there are relationship-driven responsibilities that a hired replacement cannot replicate.

One-time expense addbacks: Legal settlements, extraordinary repairs, a single large marketing campaign, severance from a one-time layoff. The QoE firm assesses whether these are truly one-time or whether they reflect a pattern of recurring irregular costs. A business that has a major capital expense every two years cannot claim each one as a one-time addback.

Non-cash and accounting adjustments: Depreciation, amortization, non-cash stock compensation, and other items that reduce net income without cash effect. EBITDA addbacks for D&A are standard and rarely disputed. The QoE firm focuses more on whether the depreciation level reflects a genuine capital asset base or whether the business has been underinvesting in maintenance capex to inflate reported earnings.

Personal and perquisite expenses: Insurance premiums for the owner's family, personal vehicles, personal travel, family member salaries for non-working relatives. Legitimate addbacks when genuinely personal, but the QoE firm will review whether each item is truly personal or whether it reflects a business cost that will continue under a new owner in a different form.

Revenue Quality Analysis

The revenue section of a QoE addresses the question buyers and lenders care about most: is this revenue sustainable? Revenue quality analysis looks at the sources of revenue, the contractual or relationship basis for customer retention, growth trends, and whether any revenue is non-recurring or artificially concentrated.

High-quality revenue is recurring, contractually supported, diversified across customers, and growing consistently. Low-quality revenue is project-based, concentrated in a handful of customers, declining, or dependent on the seller's personal relationships that may not transfer to a new owner. The QoE revenue analysis quantifies where the business falls on this spectrum.

Revenue Quality Factors the QoE Examines

✓Revenue by customer for each year in the review period, with year-over-year retention analysis
✓Percentage of revenue under contract versus at-will or transactional
✓Contract terms, renewal provisions, and change-of-control clauses that could affect revenue post-acquisition
✓Revenue from the top five or ten customers as a percentage of total revenue
✓Revenue recognition policies and whether revenue is recognized consistently with GAAP
✓Identification of any revenue pulled forward from future periods or revenue that is one-time in nature
✓Backlog analysis or recurring revenue metrics for businesses with subscription or service models

Revenue quality findings directly affect how buyers and lenders think about the purchase price multiple. A business with 80% recurring, contractually supported revenue might justify a higher multiple than a business with revenue concentrated in a few customers and no contractual protection. The QoE gives both buyer and lender a quantified picture of revenue risk that can be incorporated into valuation and deal structure decisions. For a seller-side perspective on how revenue quality affects sale preparation, the guide to selling a small business covers what sellers should address before going to market.

Working Capital Analysis in the QoE

The QoE working capital section serves two purposes in an acquisition. First, it validates whether the business's current balance sheet reflects a normal operating level of working capital. Second, it informs where the working capital peg should be set in the purchase agreement so that the closing adjustment mechanism is anchored to actual normalized operations rather than a manipulated pre-closing balance sheet.

Working capital in the QoE is typically analyzed on a monthly basis over the trailing twelve to twenty-four months. This monthly view surfaces seasonal patterns that a single-period snapshot would miss. A landscaping company, a retail business, or any operation with strong seasonal cash flow patterns will show significant month-to-month variation in working capital. The QoE firm identifies the pattern and recommends a peg methodology that accounts for the expected level of working capital at the anticipated closing month.

Beyond seasonality, the working capital analysis flags anomalies. An unusual spike in accounts receivable in the months before closing suggests the seller has been generating revenue without collecting. An unusual decline in accounts payable suggests the seller has been paying vendors faster than normal, reducing current liabilities artificially. Either pattern inflates the reported working capital position and, if not caught, would result in a working capital peg set above what the business normally operates at, benefiting the seller at the buyer's expense.

The interaction between the QoE working capital findings and the purchase agreement mechanics is direct. For a complete explanation of how working capital adjustments are structured in the purchase agreement, the working capital adjustment guide covers the peg, true-up process, and dispute resolution mechanics in detail.

Customer Concentration and Retention Analysis

Customer concentration is one of the most common risk factors identified in QoE reports for small and lower-middle-market businesses. A business where 40% of revenue comes from a single customer is a materially different risk proposition than a business where no single customer represents more than 10% of revenue. The QoE quantifies this concentration and helps the buyer understand the revenue exposure that would result if a concentrated customer relationship did not survive the ownership transition.

Concentration analysis looks at customer revenue percentages, contract status, relationship tenure, and any signals of customer-specific risk. Relevant signals include customers who are themselves under financial stress, customers whose contracts contain change-of-control provisions, and customers whose relationship with the business is personal to the seller rather than institutional. A buyer who discovers post-closing that a major customer was primarily a personal relationship of the seller that did not transfer has paid for revenue that was never truly theirs to acquire.

Retention analysis examines how the customer base has changed over the trailing review period. Are customers retained year over year? Is the business growing by adding new customers or is growth offset by customer losses? A cohort analysis showing stable or growing retention gives buyers confidence in revenue sustainability. An analysis showing high churn masked by new customer acquisition raises questions about long-term unit economics.

Deal structuring implication: High customer concentration often drives buyers to propose earnout structures tied to the retention of concentrated customers post-closing. If the seller's largest customer represents 35% of revenue, the buyer may offer a portion of the purchase price as an earnout contingent on that customer's continued engagement for 12 to 24 months after closing. This shifts the concentration risk back to the seller. The seller financing guide covers how risk-sharing structures like earnouts fit into the overall deal financing stack.

Addbacks the QoE Will Challenge

Not every addback the seller claims will survive QoE scrutiny. Some are legitimate and the QoE confirms them. Others are aggressive, poorly documented, or simply wrong, and the QoE reduces or eliminates them. Understanding which categories of addbacks face the most scrutiny helps both buyers and sellers prepare for the due diligence process.

Addbacks for expenses "already eliminated": Sellers sometimes claim addbacks for expenses they have already stopped incurring. If the seller discontinued a marketing program six months ago, the cost saving is already in the trailing financials and should not be added back again on top of the reduced expense base. Double-adding a cost reduction is a common overstatement that QoE firms look for explicitly.

Recurring items labeled as non-recurring: Repairs and maintenance that happen every two years. Legal costs that recur in different forms annually. Consulting fees paid to the same consultant each year under different project labels. If a cost appears in multiple trailing periods, it is not non-recurring, regardless of how the seller has labeled it.

Owner compensation without market replacement analysis: An addback for above-market owner compensation is legitimate. An addback that assumes the owner's role can be filled for zero cost, or that dramatically underestimates replacement cost, is not. The QoE firm will assess what a qualified replacement for the owner's functional role would cost in the market.

Depreciation inconsistencies: A seller who has been underinvesting in capital expenditures to reduce depreciation expense and inflate EBITDA will show low depreciation relative to the asset base. The QoE firm will review whether the business needs a higher ongoing capex level to maintain operations, which would reduce the effective free cash flow available for debt service even if it does not show up in the EBITDA adjustment.

Related-party transactions at non-market rates: Rent paid to an entity owned by the seller, management fees paid to a related holding company, or purchases from a supplier owned by the seller's family at above-market prices. If the business pays below-market rent to the seller-owned entity, the buyer will need to pay market rent post-closing. The addback should reflect the net economic change, not just eliminate the related-party cost entirely.

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How Lenders Use QoE Findings

Lenders in acquisition financing, whether SBA lenders or conventional commercial lenders, rely on QoE findings to underwrite the loan. The debt service coverage ratio (DSCR) is the central metric: the lender needs confidence that the business's cash flow is sufficient to service the acquisition debt. That cash flow calculation starts with adjusted EBITDA, which the QoE either validates or corrects.

When the QoE reduces the seller's adjusted EBITDA, the lender's DSCR analysis changes. If the reduction is significant, the lender may reduce the loan amount, require additional equity injection from the buyer, or decline to finance the acquisition at the proposed purchase price. This is one of the most direct ways QoE findings affect deal economics: a reduction in QoE-adjusted EBITDA can cascade through the entire financing structure.

SBA lenders have specific requirements around the quality and independence of the financial analysis they rely on. For acquisitions above certain size thresholds, SBA lenders require that an independent business valuation be performed, and many require or strongly prefer an independent QoE to support the adjusted earnings figure used in the valuation. The SBA acquisition loans legal guide covers the full documentation requirements that SBA lenders impose on the transaction.

How Lenders Apply QoE Findings

✓QoE-adjusted EBITDA replaces seller-represented EBITDA as the basis for DSCR calculation
✓Revenue quality findings inform lender confidence in earnings sustainability
✓Customer concentration findings may trigger lender conditions around key customer retention
✓Working capital findings inform lender views on post-closing liquidity
✓Material balance sheet risks may require additional reserves, holdbacks, or loan conditions

For the complete picture of financing options and how they interact with due diligence findings, the business acquisition financing guide covers the full capital stack including SBA loans, seller notes, and equity structures.

QoE Cost and Typical Timeline

QoE cost is driven primarily by the number of billable hours the QoE firm spends on the engagement. That hour count depends on business complexity, data availability, the number of entities involved, and the scope of work requested. Simple businesses with clean, organized financials and a single legal entity cost less to analyze than multi-entity operations with complex revenue streams and disorganized records.

For small and lower-middle-market transactions, buyers should expect QoE costs in the range of $8,000 to $30,000 for a standard scope engagement. More complex businesses, or situations where the seller's records require significant cleanup before analysis can begin, can push costs above this range. The cost is borne by the buyer in a buy-side engagement and by the seller in a sell-side engagement.

Factors That Increase QoE Cost

✓Multiple legal entities (holding company plus operating company, or multiple business locations)
✓Incomplete or disorganized seller records requiring reconstruction before analysis
✓Cash-intensive businesses requiring bank statement-level tracing
✓Complex revenue recognition (long-term contracts, percentage-of-completion, deferred revenue)
✓Large or complex inventory requiring count verification and valuation analysis
✓Seller's reluctance to provide requested information in a timely manner
✓Significant related-party transactions requiring verification of market terms

On timeline, a standard QoE takes three to six weeks from engagement to delivery, assuming prompt data delivery from the seller. Buyers should factor this timeline into their LOI due diligence period. A sixty-day due diligence period that starts with two weeks of document collection may leave only six weeks for the QoE, which can be tight for complex businesses.

The practical approach is to engage the QoE firm immediately upon LOI signing, provide them with a preliminary data request list, and have that list delivered to the seller on day one of the due diligence period. Parallel initiation of the QoE and legal due diligence maximizes the use of the due diligence period and reduces the risk of timeline compression at the end of the period.

How QoE Findings Reshape the LOI Price

The LOI establishes the purchase price and key deal terms based on the seller's represented financials. The QoE, which occurs after the LOI is signed and during the due diligence period, may reveal that the seller's represented earnings were overstated. When that happens, the buyer has leverage to renegotiate the price.

The most common scenario: the seller represents adjusted EBITDA of $800,000. The LOI is signed at a 4.5x multiple, implying a purchase price of $3.6 million. The QoE finds that $150,000 of addbacks are not supportable, reducing adjusted EBITDA to $650,000. The buyer now has a documented, independent basis to argue that the purchase price should be $2.925 million (4.5x times $650,000), a reduction of $675,000. This is the price chip conversation, and it happens in most transactions where QoE findings deviate from the seller's representations.

Price chip negotiations can go in several directions. The seller may accept a reduced purchase price if the QoE findings are clear and the documentation is solid. The seller may counter with their own explanation for the disputed addbacks and negotiate a partial reduction. In some cases, the parties restructure the deal rather than reduce the headline price: more seller financing, an earnout tied to earnings performance, or a holdback pending resolution of a specific QoE finding. The seller financing guide covers how these structures work.

Legal counsel's role in QoE findings: QoE findings are financial in nature, but acting on them requires legal judgment. Whether the LOI gives the buyer the right to terminate or renegotiate based on QoE findings, how to structure the renegotiation conversation, and whether the findings give rise to representations and warranties claims after closing are all questions that require counsel involvement. The QoE firm reports findings. Counsel determines what to do with them. This coordination should begin before the QoE is completed, not after.

Sell-Side vs Buy-Side QoE Trade-offs

The choice between commissioning a sell-side QoE before going to market versus waiting for the buyer to commission a buy-side QoE is a strategic decision for sellers. Each approach has distinct trade-offs.

The sell-side QoE gives the seller control over timing and the ability to address issues before they surface during a buyer's due diligence. A seller who discovers that certain addbacks are not supportable can adjust the offering memorandum price accordingly, rather than being surprised by a price chip conversation in the middle of exclusive negotiations. It also signals to buyers and their lenders that the seller's numbers have already been tested, which can reduce the time buyers need for their own due diligence.

The disadvantage of a sell-side QoE is that buyers may not fully rely on it. Sophisticated buyers, and virtually all SBA lenders, will want to see work performed by a firm they or their lender selected, not one selected by the seller. In those cases, the seller ends up paying for a QoE that the buyer effectively ignores and then commissions their own. The seller has incurred the cost without gaining the benefit of reduced buyer diligence.

The buy-side QoE gives the buyer maximum independence and direct reliance rights. The buyer controls scope, the QoE firm's obligations run to the buyer, and the report is prepared without any influence from the seller. The downside is that the buyer absorbs the cost and the timeline. In competitive deal processes where buyers are competing for the same acquisition, a buyer who needs four to six weeks for a QoE may lose to a buyer who has accepted the seller-side QoE and can close faster.

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Frequently Asked Questions

How much does a QoE report cost?

QoE reports for small and lower-middle-market transactions typically cost between $8,000 and $30,000, depending on business complexity, number of entities, quality of the seller's records, and scope of work. Simpler single-entity businesses with clean financials trend toward the lower end. Multi-entity operations or businesses with complex revenue recognition, significant inventory, or disorganized records can push costs above this range. The cost scales with the number of hours senior accounting professionals spend on the engagement.

Is a QoE required for SBA loans?

The SBA does not mandate a quality of earnings report by name, but SBA 7(a) lenders routinely require an independent business valuation for acquisitions above $500,000 involving goodwill, and many require or strongly encourage a QoE to support the adjusted earnings figure used in underwriting. In practice, lenders underwriting SBA acquisition loans want confidence that the earnings number used for debt service coverage calculation is real and sustainable. Buyers using SBA financing should expect their lender to ask for a QoE on any transaction above $1-2M.

Who pays for the QoE (buyer or seller)?

In the traditional model, the buyer pays for the buy-side QoE as part of their due diligence costs. In sell-side processes, the seller pays for a QoE before going to market and shares it with prospective buyers. Some buyers accept a seller-side QoE. Others insist on their own regardless. SBA lenders often require an independent QoE that the lender or buyer has selected, which means the seller-commissioned QoE may not suffice for lender underwriting purposes even if the buyer accepts it.

How long does a QoE take?

A standard buy-side QoE takes three to six weeks from engagement to delivery, assuming prompt data delivery from the seller. The timeline depends on how quickly the seller provides organized financial records, bank statements, customer-level revenue data, and supporting schedules. Disorganized seller records can add two to four weeks. Complex businesses take longer. Buyers should engage their QoE firm on day one of the due diligence period and initiate the data request immediately to avoid timeline compression at the end of the diligence window.

Can QoE findings cancel a deal?

Yes. A QoE that reveals earnings significantly below what the seller represented can result in deal failure if the gap is too large to bridge through price reduction, deal restructuring, or additional seller financing. More commonly, QoE findings lead to a price chip negotiation or deal restructuring rather than outright termination. Whether the buyer has the legal right to exit based on QoE findings depends on the due diligence contingency language in the LOI. Buyers should ensure their LOI gives them a clear exit right if the QoE findings are materially adverse.

Is a QoE the same as an audit?

No. An audit is a formal attestation engagement that produces an opinion on whether financial statements are presented fairly in conformity with GAAP. A QoE is an agreed-upon procedures engagement that addresses deal-specific questions: Are addbacks legitimate? Is revenue sustainable? Is working capital normal? A QoE does not produce an opinion on the financial statements. Even when a seller has audited financials, buyers in material acquisitions typically commission a QoE because an audit does not answer the questions relevant to the purchase price negotiation.

Does the QoE give a formal opinion on financial statements?

No. The quality of earnings report does not provide an audit opinion or any formal attestation on the accuracy of the seller's financial statements. The QoE firm performs agreed-upon procedures, reports observations and analysis, and identifies risks. Buyers should not treat a QoE as equivalent to audited financials, and the QoE does not replace the need for strong financial representations and warranties in the purchase agreement. Those representations give the buyer legal remedies if post-closing financials prove to be inaccurate.

Should a seller get their own QoE before going to market?

In most cases, yes. A sell-side QoE helps the seller control the narrative, address issues proactively before buyer due diligence surfaces them, and enter negotiations with a defensible earnings number. It signals process sophistication to buyers and can accelerate deal timelines if buyers rely on the existing QoE rather than delaying closing to commission a new one. The cost is typically recoverable if it prevents a price chip or shortens the deal timeline. Sellers working with M&A advisors or investment bankers in competitive sale processes should strongly consider a sell-side QoE before launching the process.

Understand the Full Financing and Due Diligence Framework

Quality of earnings analysis sits within a broader set of due diligence and financing mechanics. Review the complete guides below for how all the pieces connect.

How to Finance a Business Acquisition: Complete Guide M&A Due Diligence Guide SBA Acquisition Loans: Legal Requirements Working Capital Adjustment at Closing Business Valuation for M&A: Complete Guide