Understanding Quality of Earnings When Selling a Business

Today’s buyers are looking deeper than revenue growth and profitability. They want to understand whether earnings are sustainable, whether financial performance can be replicated, and whether there are risks that could affect future value. The questions raised during diligence can influence everything from valuation and deal structure to the overall timeline of a transaction.

A quality of earnings (QofE) report helps you answer those questions before they arise. By analyzing the sustainability and reliability of your earnings, a QofE provides a clearer picture of your company's true financial performance, identifying one-time events, accounting anomalies and other factors that may affect value. More importantly, it gives you an opportunity to address potential concerns, validate key assumptions and make informed decisions about timing, readiness, and growth before pursuing a sale.

Whether you're actively preparing for a transaction or simply evaluating your options over the next several years, understanding the quality of your earnings can help you navigate the process with greater confidence, reduce surprises during diligence, and position your business for a stronger outcome.

How would your earnings hold up under buyer scrutiny?

A sell-side QofE can help identify adjustments, risks and questions before diligence begins.

Talk with a transaction advisory professional about your readiness

What Buyers Want to Understand About Your Earnings

A Quality of Earnings (QofE) report is a comprehensive analysis of a company’s financial health. It analyzes precisely how your business accumulates revenue. Unlike a traditional audit, which focuses on compliance with accounting standards, a QofE digs deeper into the sustainability and reliability of earnings.

These are the same areas buyers often scrutinize during diligence. Understanding them in advance allows you to address concerns before they affect negotiations or valuation.

Normalized level of EBITDA and the addbacks to bridge from reported EBITDA to adjusted EBITDA
Fluctuations in annual and monthly financial information
Revenue and gross margin by product, customer, or distribution segments
Operating expenses and employee analysis
Key balance sheet highlights
Normalized levels of working capital needed to operate the business

While every transaction is different, owners who ask these questions before going to market are often better prepared for buyer diligence and valuation discussions.

Have we had any significant one-time events, infused significant growth, or added process improvement capital that affected our financial performance?
Have we prudently managed our working capital and cash flow?
Do we have discretionary expenses affecting EBITDA?
Do we have any personal expenses running through the business?
Are all related party transactions at arm’s length?
How do our compensation packages compare to the market?
Have we reasonably forecasted our growth?
Have we outgrown our current technologies?
What is the outlook for our organization?

Although primarily focused on financials, the QofE report may also explore your IT landscape, finance team composition, accounting processes, and other operational details to assess the overall quality and reliability of financial data.

Benefits of a Sell-Side QofE Report

A sell-side QofE is more than a diligence exercise. It can provide valuable insights into the strengths, risks, and opportunities within your business while giving you more control over the transaction process before buyers begin their review.

Conducting a sell-side QofE helps you:

Gain insight into how buyers will assess your earnings and key financial areas.
Demonstrate to potential buyers that you’re committed to selling and have taken steps to prepare your company for a sale.
Address and resolve past financial issues to potentially enhance your company’s value.
Ensure all necessary add-backs and adjustments are properly documented.
Tackle challenging questions and concerns before buyer discussions begin.
Prepare documents in advance, reducing pressure on your team during the sale process.

Depending on the results, waiting to sell for another year after the QofE is completed could return significant value, as management would have time to focus on improving key performance indicators and value drivers.

Common Issues Identified During a Quality of Earnings Review

No business is perfect, and most QofE reviews uncover areas that deserve attention. Identifying these items before buyers begin diligence can help reduce surprises and improve transaction readiness.

Common findings include:

Customer concentration concerns
Owner expenses running through the business
Unclear EBITDA adjustments
Inconsistent revenue recognition practices
Working capital challenges
Related-party transactions requiring additional documentation
Financial reporting processes that make trend analysis difficult

Finding these issues doesn’t necessarily hurt value. More often, it provides an opportunity to address them proactively before a transaction moves forward.

Know what buyers may find before they find it.

Identifying earnings adjustments and financial reporting concerns earlier can give you more time to address them before diligence.

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The Quality of Earnings Process

The process for a QofE report begins when you are considering selling your company or a segment of your company. Most sellers engage a QofE advisor six to 12 months before going to market, giving leadership time to act on the findings before buyers begin diligence.

After you’ve selected a third-party advisor to conduct the QofE report, you can expect the following:

Introductory Consultation

The initial meeting is designed to discuss the objectives of the engagement, provide an overview of your business operations, and share key financial information.

Information Gathering

The QofE team will gather all relevant data from your business, including financial statements, tax returns, and customer contracts.

It’s essential to appoint a key individual within your organization to communicate with the QofE team throughout the engagement. This person will assist with data requests and ensure confidentiality throughout the process.

Initial Analysis

The QofE advisors will begin analyzing the collected data to identify key areas of focus. Preliminary findings, questions, or clarifications will be communicated to your internal team.

Deep Dive Analysis

Upon collecting all necessary data and clarifying goals, the QofE team will conduct a detailed analysis of your financial data to assess the quality of your earnings. This stage includes:

A thorough examination of revenue, expenses, and key financial metrics.
Identification of one-time items, unusual trends, or adjustments.
Requests for additional data or explanations as needed.

Discussion of Findings

An initial QofE report will outline the findings of the engagement, including any adjustments or key issues. A meeting will be scheduled with your advisors to discuss the report, gather your feedback, and address any questions.

Final Report

After incorporating your feedback and clarifications, the advisors will finalize the report.

Follow Up

Based on the engagement results and your organizational goals, the QofE advisors may provide ongoing support or schedule a follow-up review once adjustments and improvements have been implemented.

As the QofE process proceeds, stay involved. This allows you to better understand not only the due diligence process but also deal options, value points, and the final deliverable.

Moving Toward a More Valuable Exit

Every business owner's transition timeline is different. Whether you're preparing for a sale next year or simply exploring your options, understanding the quality of your earnings today can help you make more informed decisions about timing, value and readiness. Our advisors can help you evaluate where you stand and identify practical steps to strengthen your position before a transaction.

Take the next step toward a stronger sale.

Connect with our transaction advisory professionals and start preparing for a smoother, more valuable exit — on your terms.

Frequently Asked Questions

What is a quality of earnings report?

A QofE report analyzes the sustainability and reliability of a company’s earnings. It identifies factors such as one-time events, accounting anomalies and other adjustments that can help buyers and sellers better understand the business’s underlying financial performance.

What’s the difference between a financial audit and a QofE?

An audit focuses on whether financial statements comply with accounting standards. A quality of earnings review evaluates the sustainability and reliability of earnings and identifies factors that may affect valuation.

How can a QofE help me prepare for a sale?

A sell-side QofE can help you understand how buyers may view your earnings, identify potential diligence issues, and support adjustments to reported EBITDA. Addressing those areas before going to market may help reduce surprises and give you greater confidence going into buyer discussions.

Do I need a quality of earnings report before selling my business?

A QofE is not required to sell a business. However, buyers may conduct their own quality of earnings review as part of due diligence. Completing a sell-side QofE can help you identify potential concerns, document adjustments and prepare for buyer questions before diligence begins.

Can a QofE increase the value of my business?

A QofE does not automatically increase business value. It can help identify and document EBITDA adjustments, surface financial reporting concerns, and provide additional support for assumptions used during valuation discussions.

When should I get a QofE before selling my business?

We recommend engaging a QofE advisor six to 12 months before going to market. This can give you time to address findings, improve financial reporting and prepare documentation before buyers begin their review.

How long does a QofE process take?

Most QofE engagements take 4–6 weeks from engagement to draft report, depending on the complexity of your business, availability of documentation, and depth of analysis required.

What documents are required for a QofE?

Typical requests include financial statements, general ledger data, tax returns, customer contracts, AR/AP reports, payroll records, revenue schedules, and other operational documentation needed to validate earnings.

How does a QofE impact valuation?

A QofE strengthens your valuation by identifying add backs, validating EBITDA, highlighting growth drivers, and resolving issues before negotiations begin.

What happens if the QofE uncovers issues?

Finding an issue does not necessarily mean you are not ready to sell. Identifying concerns before buyer diligence gives you an opportunity to understand them, determine what can be addressed and prepare to explain them during a transaction.

Should I get a QofE if I’m not planning to sell soon?

Potentially. A QofE can still be valuable for operational improvement, succession planning, financing, or early stage exit readiness. Many owners use a QofE 18–36 months before a potential transaction to identify weak spots in working capital management, customer concentration, or revenue quality — giving them time to address findings and grow into a higher multiple.