What does a buyer actually learn from a quality of earnings report that your financial statements don't already show? In short, whether the profit you report is real, repeatable, and able to survive line-by-line scrutiny. A quality of earnings review is the forensic financial analysis a serious buyer runs before closing, and increasingly the study savvy sellers commission first, before a buyer ever opens the books.
For a founder who has spent decades building a company, that document can decide the difference between a clean close at the agreed price and a renegotiation that quietly erodes six or seven figures of proceeds. This piece breaks down what the report measures, how it differs from an audit, how adjusted EBITDA and closing adjustments are calculated, and what the whole thing costs.
What the Report Actually Measures
A quality of earnings study - abbreviated QoE, and occasionally written QoFE - answers a single question: how much of your reported profit will still be there for the next owner? The academic literature has never agreed on one definition of earnings quality. A widely cited Duke and Columbia working paper by Dichev, Graham, Harvey, and Rajgopal found no consensus among CFOs and researchers, with high-quality earnings described variously as persistent, predictive of future cash flow, or reflective of economic reality. In a deal context, practitioners narrow that to something concrete: earnings that are recurring, normalized, and free of accounting noise.
To get there, the report walks your income statement down through three numbers. Net income is what your tax return shows. Reported EBITDA adds back interest, taxes, and non-cash items like depreciation and amortization to approximate operating cash flow. Adjusted EBITDA is where the real work happens, as the analyst strips out one-time and non-recurring items to isolate the profitability a buyer can actually count on. That adjusted figure, multiplied by a market multiple, is the metric that sets your valuation.
The key components of a full report are the earnings normalization, a review of debt and debt-like items, and a balance-sheet assessment. Together they give a buyer a clear read on the company's financial health, not just its historical results.
A QoE Report Is Not an Audit
Owners with a recent audit often assume a QoE is redundant. It isn't, and the two answer different questions. An audit is an attestation: a CPA firm tests your financial statements against GAAP and applicable accounting standards, then issues an opinion that the numbers fairly present historical results. It is backward-looking and built on sampling.
A quality of earnings analysis is a consulting engagement, not an attestation. It sets aside the clean-opinion question and instead digs into whether your earnings are sustainable and predictive, using detailed account-level review rather than statistical samples. An audit tells a lender the books are accurate; a QoE tells a buyer what those books are actually worth going forward.
| Dimension | Financial Audit | Quality of Earnings Report |
|---|---|---|
| Core question | Do the statements comply with GAAP? | Are the earnings real and repeatable? |
| Orientation | Backward-looking | Forward-looking and predictive |
| Method | Sampling and testing | Account-level detail and trend analysis |
| Output | Clean or qualified opinion | Adjusted EBITDA and a findings report |
| Basis | GAAP attestation | Consulting engagement, no attestation |
| Who relies on it | Lenders, regulators, shareholders | Buyers, sellers, and deal lenders |
Source: DueDilio, 2025; Valutico
In Iconic's experience guiding owners through diligence across more than 200 businesses, the sellers most caught off guard are the ones who assumed an audit would carry the weight a buyer's team expects from a QoE.
Adjusted EBITDA and the Add-Backs That Define Your Number
The core of the report is the EBITDA bridge, the documented walk from reported EBITDA to adjusted EBITDA. Add-backs are the adjustments that remove costs a future owner will not incur or that do not reflect normal operations. Common examples include an owner's above-market salary, one-time legal settlements, personal expenses run through the business, and non-recurring consulting fees. Each defensible add-back raises adjusted EBITDA, and because your price is a multiple of that number, a single dollar of supportable add-back can be worth several dollars at closing.
Add-backs cut both ways, though, and this is where a rigorous quality of earnings review protects rather than flatters you. A good QoE normalizes earnings; it does not inflate them. The goal is a number that survives a buyer's challenge, not the highest figure you can put on paper.
Aggressive adjustments invite scrutiny. S&P Global Ratings' annual EBITDA add-back study found add-backs peaked at 32% of management-projected EBITDA in 2021 before easing to 26% by 2023. That data tracks large leveraged-loan issuers rather than small-business deals, but the direction is the same across the market: buyers and their lenders have grown skeptical of optimistic adjustments, and a report that supports every add-back with evidence can uncover value that an unsupported spreadsheet never will.
Working Capital: The Adjustment That Quietly Moves Your Proceeds
Even after the multiple is set and a price is agreed, one mechanism can still shift your proceeds at closing: the net working capital adjustment. Buyers expect to take over the business with a normal level of working capital already in place, enough cash tied up in receivables and inventory, net of payables, to keep operating without an immediate injection of their own money.
The mechanism is a peg and true-up. Buyer and seller agree on a target working capital level at signing, usually a trailing-twelve-month average, then compare it to the actual change in net working capital delivered at closing. Come in below the peg and your price drops close to dollar-for-dollar; deliver a surplus and it rises.
This is not a niche clause. According to the SRS Acquiom 2024 M&A Deal Terms Study, more than 96% of private-target transactions include a working-capital adjustment provision, making it the most common purchase-price adjustment in the market. SRS Acquiom also reports that the median separate escrow for that adjustment has held near 1% of transaction value, cash that sits untouched until the true-up is final.
A good QoE examines your historical trends so the peg is set on realistic, defensible numbers rather than a single flattering month. Get it wrong and you can hand back a slice of the headline price weeks after you thought the deal was done.
Buy-Side, Sell-Side, and Confirmatory QoE
There are three flavors of QoE, separated by who commissions the work and when. A buy-side QoE is ordered by the buyer after the LOI is signed; the buyer pays and controls the scope. A sell-side QoE is commissioned by the seller three to twelve months before going to market, so problems surface on the seller's schedule instead of mid-diligence. A confirmatory QoE runs 60 to 90 days after close to validate the closing balance sheet and finalize the true-up.
The sell-side quality of earnings study is where the data gets interesting. GF Data's analysis of 360 transactions completed since Q3 2024 found that sellers who ran a sell-side report closed at an average of 7.4x TEV/EBITDA, versus 7.0x for those who didn't, with the benefit most pronounced on deals above $50 million in enterprise value.
Adoption follows the same divide. Scott Linch, managing partner of Forvis Mazars Capital Advisors, estimates that at least 90% of private-equity-backed deals now use a sell-side QoE, while only about 50% of founder-led lower-middle-market businesses commission one. 'It's just part of their playbook,' he says of institutional sellers. Michael Vaccarella, a partner at Wipfli, is blunt about the operational payoff: 'I'd say that over 90% of the time, it moves the deal faster than it would've [gone] without it.' For founder-led companies, that makes a sell-side review one of the highest-return preparation steps before an acquisition process even begins, which is why Iconic builds an earnings review into its work with sellers long before they meet buyers.
How Long a QoE Takes and What It Costs
Plan for three to six weeks. A standard quality of earnings engagement runs in that window, though estimates vary with the quality of your records and the complexity of the business. BPM LLP and Baker Tilly both cite four to six weeks; OGS Capital puts standard engagements closer to three to four; complex, multi-entity, or carve-out deals can stretch past eight. The work moves through four phases: information gathering, analysis and documentation, review and discussion of findings, and final report preparation.
Cost tracks deal size, scope, and the tier of firm you hire, which is why published ranges look so wide.
| Deal size | Typical QoE cost | Source |
|---|---|---|
| Under $10M in revenue | $5,000 - $35,000 | Morgan & Westfield; Eton |
| $1M - $5M enterprise value | $6,000 - $25,000 | DueDilio, 2025 |
| $5M - $100M enterprise value | $25,000 - $200,000 | DueDilio, 2025 |
| $100M+ enterprise value | $200,000 - $500,000+ | DueDilio, 2025 |
Source: DueDilio, 2025; Morgan & Westfield; Eton Venture Services
Scope is the biggest swing factor. A limited report on a clean, single-entity business sits at the low end; a comprehensive report on a multi-entity company with messy records, customer concentration, and inventory complexity climbs toward the top. DueDilio notes a QoE is considered best practice for deals over $1 million and is often mandatory for institutional buyers and lenders, even though it is never legally required.
When Earnings Don't Hold Up: QoE and Broken Deals
The cost of a sell-side review looks trivial next to the cost of a deal that dies after the LOI. Axial's Dead Deal Report, an analysis of 75 unsuccessful lower-middle-market transactions in 2025, found that diligence findings outside the QoE were the single most common reason deals collapsed post-LOI, at 25.3%, with QoE EBITDA discrepancies close behind at 21.3%. Most of those failures land after the letter of intent is signed; if you are new to the loi meaning in m&a, the LOI is the provisional-price handshake that opens the door to full diligence.
The trend is what should worry sellers. QoE EBITDA discrepancies more than doubled as a cause of broken LOIs, from 10.6% in 2023 to 21.3% in 2025, even as financing-related failures fell from 21.3% to 10.7% over the same period. Deals are dying less over money and more over whether the earnings were real in the first place.
A sell-side quality of earnings review is the defense. When a seller has already found and documented the adjustments, a buyer's due diligence team has far less room to reprice on 'surprise' findings. When they haven't, a discovered discrepancy usually triggers a renegotiation, and the revised terms flow straight into the asset purchase agreement as a lower price, a bigger escrow, or an earnout that pushes risk back onto the seller.
Frequently Asked Questions
How much does a quality of earnings report cost?
For businesses under $10 million in revenue, expect roughly $5,000 to $35,000, based on figures from Morgan & Westfield and Eton Venture Services. Mid-market deals with $5M-$100M in enterprise value typically run $25,000 to $200,000, per DueDilio's 2025 guide. Scope and the complexity of your books drive most of the variance, not deal size alone.
What is the difference between buy-side and sell-side QoE?
A buy-side QoE is commissioned and paid for by the buyer after the LOI to validate the seller's numbers. A sell-side QoE is ordered by the seller before going to market, so issues surface on the seller's timeline. GF Data found sell-side reports correlate with higher closing multiples, 7.4x versus 7.0x TEV/EBITDA, across 360 tracked transactions.
What are common EBITDA add-backs in a QoE report?
Typical add-backs include above-market owner compensation, one-time legal or consulting fees, personal expenses run through the business, and non-recurring costs like a single equipment failure or a discontinued product line. Each one raises adjusted EBITDA, but only defensible, well-documented add-backs survive a buyer's challenge. S&P Global has tracked add-backs running above a quarter of adjusted EBITDA in institutional deals.
What red flags does a quality of earnings analysis look for?
Common red flags include revenue recognized before it is earned, heavy customer concentration, declining margins hidden by one-time gains, deferred capital expenditure, and expenses shifted between periods to smooth results. A good QoE also tests whether reported earnings actually convert to cash flow. Findings like these are what drove QoE EBITDA discrepancies to sink 21.3% of failed 2025 deals, according to Axial.
What This Really Means Before You Sell
A quality of earnings review is not a compliance box to tick; it is the document that decides whether your reported profit becomes your realized proceeds. For founder-led businesses in particular, running that analysis before buyers arrive turns diligence from an ambush into a conversation you control. It puts the working-capital peg, the add-backs, and the earnings questions on your schedule, not the buyer's.
If you are weighing a sale in the next few years, the highest-return move is to understand your numbers the way a buyer will before anyone else does. Iconic works with founders to prepare for exactly that scrutiny, and you can start with a complimentary business valuation to see where your adjusted EBITDA and multiple stand today.
