Quality of Earnings reports that show what a business actually earns.

A quality of earnings report answers one question a buyer cannot afford to get wrong: does this company actually earn what the seller says it earns, and will it keep earning it after the deal closes? Reported profit is a starting point, not an answer. A QoE takes that number apart and rebuilds it around earnings that are real, recurring, and defensible.

The core exercise is normalizing EBITDA. We start from reported earnings before interest, taxes, depreciation, and amortization, then adjust for items that distort the true run rate. Out come one-time events — a lawsuit settlement, a pandemic relief grant, a gain on selling equipment. Out come owner-specific costs a new buyer will not carry, like an above-market founder salary or a family member on payroll. In go normal costs the seller has been running through personal accounts. What remains is adjusted EBITDA: a cleaner picture of what the business throws off in a typical year.

From there the analysis widens. We separate recurring revenue from one-time spikes, test how and when the company recognizes revenue, trace reported profit back to actual cash, and study working capital so the buyer knows how much cash the business needs just to keep running. Each of those threads can move the price, the deal structure, or the decision to walk. That is why a QoE has become standard practice on serious mid-market transactions rather than a nice-to-have.

A QoE shows up whenever real money changes hands on the strength of a company’s earnings. The buyer is rarely the accounting department. It is the person or institution writing the check, and each one reads the report for a different reason.

• Acquirers and strategic buyers commission a QoE to test the seller’s number before they anchor an offer to it. A single recurring adjustment can move enterprise value by a multiple of the change in EBITDA, so a few hundred thousand dollars of misclassified profit becomes a very expensive rounding error.
• Private equity firms run a QoE on nearly every platform and add-on deal. They need to underwrite a return, defend the number to their investment committee, and hand clean diligence to their lenders. A weak QoE kills a deal at committee before it ever reaches a term sheet.
• Lenders lean on the report to size debt. If the cash flow supporting a loan turns out to be one-time, the coverage math falls apart. A QoE gives them adjusted EBITDA they can actually lend against.
• Founders preparing to sell increasingly order a sell-side QoE of their own. It lets them find and explain the adjustments on their terms, defend their asking price with evidence, and avoid getting surprised by the buyer’s findings midway through diligence.

Timing matters as much as the audience. On the buy side, the report belongs after a letter of intent but before the money is committed, when there is still room to renegotiate. On the sell side, smart owners run it 6 to 12 months ahead of going to market, so they have time to fix what the analysis surfaces rather than discount for it.

A QoE report is built to be read by a deal team under time pressure, so it leads with the findings that move the number. At the center sits the adjusted EBITDA bridge: a line-by-line walk from reported earnings to normalized earnings, with every adjustment explained and evidenced. A reader should be able to see exactly which items we removed as one-time, which we added back, and why each one is or is not sustainable.

Around that bridge, the report covers the pieces a buyer needs to price and structure the deal. Revenue recognition quality shows whether income is booked when it is truly earned. A proof of cash reconciles earnings to bank statements so the profit is not just an accounting artifact. The working capital analysis models the net-working-capital peg — the normal level of operating cash the buyer should expect to inherit — which directly affects the price at close. Customer and supplier concentration flags how much of the earnings depend on a handful of relationships. Run-rate adjustments reset the baseline for recent contract wins, losses, headcount changes, and pricing moves, so the forward number reflects the business as it stands today, not as it averaged last year.

Timing follows the deal. A focused mid-market QoE typically runs 3 to 5 weeks from a clean data room, though a smaller or well-organized target can move faster and a complex, multi-entity business takes longer. The single biggest driver of the timeline is not the deal size — it is the state of the target’s books. When the underlying records are messy, most of the effort goes into reconstructing them before the real analysis can even begin.

Most firms that sell a security audit or a compliance report cannot produce a quality of earnings analysis, because it demands something different: a licensed CPA who reads financial statements for a living and understands how a deal is actually priced. This is where a CPA firm earns its place at the table. We do not just accept the seller’s spreadsheet and reformat it. We test the numbers behind it.

Our edge is a dual lens. We read the controls and the numbers together. When we normalize EBITDA, we also ask whether the accounting process that produced it can be trusted, because a company with weak controls often has earnings that look better on paper than they are in cash. That combination — deal-grade financial analysis plus an auditor’s instinct for where the records bend — is what separates a QoE that survives negotiation from one that falls apart the first time the other side’s advisors push on it.

You also get senior people on your file rather than a rotating cast of juniors, fixed scope you can budget around, and a delivery model built to keep pace with a live transaction. When the deal team on the other side raises a question at 9 pm, the person who built your adjustment is the one who answers it.