Most business owners think a Quality of Earnings report is something you order when you’re ready to sell. That assumption costs them—sometimes hundreds of thousands of dollars in valuation, sometimes years of operating with blind spots they never knew existed.
A QoE report reveals what your financial statements don’t: whether your profits are real, repeatable, and reliable. This guide covers what a quality of earnings analysis contains, how it differs from an audit, and why getting one now—even without a buyer in sight—gives you the clarity to build a more valuable business.
What Is a Quality of Earnings Report
Even if you aren’t selling now, a Quality of Earnings (QoE) report is vital for understanding your business’s true financial health. This type of analysis goes beyond your standard profit and loss statement to answer a simple question: are your reported earnings real, repeatable, and reliable—or are they inflated by one-time gains, accounting quirks, or hidden costs that won’t show up again next year?
Your regular financial statements tell you what happened. A QoE report tells you whether those results can be trusted. It strips away the noise—owner perks, deferred maintenance, unusual revenue spikes, aggressive accounting—to reveal what you, a buyer, or a lender can genuinely expect going forward.
You might hear this called a QOFE (Quality of Financial Earnings) report. The terms mean the same thing: a deep-dive analysis that uncovers the real story behind your numbers.
What QoE Means in Finance and Business Valuation
In finance, QoE meaning comes down to one question: how reliable and repeatable are your earnings? A business might show strong profits on paper, yet those profits could stem from revenue booked too early, expenses pushed to next year, or circumstances that won’t repeat.
Quality of earnings differs from reported earnings because it normalizes your financials. Normalization is the process of adjusting for anomalies, accounting inconsistencies, and items that don’t reflect ongoing operations. The result is a clearer picture of what your business actually generates—and what it’s likely to generate in the future.
For business valuation, this distinction matters. Buyers and investors don’t pay multiples on inflated or unreliable earnings. They pay for sustainable cash flow, which is exactly what a QoE report quantifies.
What a Quality of Earnings Report Contains
A comprehensive quality of earnings report examines several interconnected areas of your business. While the specific scope varies based on your company’s complexity, most QoE analyses cover four core components.
Revenue Quality and Sustainability
This section looks at whether your revenue streams are recurring, contractual, or one-time. A business with 80% recurring revenue from long-term contracts presents a very different risk profile than one dependent on project-based work that has to be re-won each quarter.
The analysis also identifies customer concentration risks. If 40% of your revenue comes from a single client, that’s a vulnerability worth understanding—whether you’re selling or not.
EBITDA and Normalized Earnings
Adjusted EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) represents the “true” operating profit of your business after removing non-recurring items. This normalized figure becomes the baseline for valuation discussions and strategic planning alike.
Working Capital Analysis
Working capital requirements often surprise business owners. This section evaluates your cash conversion cycle, seasonal fluctuations, and whether your current working capital levels are understated or overstated relative to actual operational needs.
Customer and Revenue Concentration
Beyond identifying concentration, this analysis flags the specific risks if key relationships end. Understanding these dependencies helps you make informed decisions about diversification—long before a potential buyer raises the concern.
How a QoE Report Differs From an Audit or Financial Review
Business owners sometimes assume their annual audit or financial review serves the same purpose as a quality of earnings report. While both involve examining your financials, they answer fundamentally different questions.
An audit verifies that your financial statements are accurate and comply with accounting standards. It looks backward, confirming that what you reported actually happened. A QoE report, on the other hand, analyzes whether those earnings are sustainable and what they mean for future performance.
| Factor | Audit or Financial Review | Quality of Earnings Report |
|---|---|---|
| Purpose | Verify accuracy of historical financials | Analyze earnings sustainability |
| Focus | Compliance with accounting standards | Forward-looking insight |
| Adjustments | Reports financials as-is | Normalizes for true profitability |
| Outcome | Opinion on accuracy | Adjusted EBITDA and risk identification |
A clean audit doesn’t guarantee quality earnings. Your financials can be perfectly accurate yet still contain one-time gains, owner-specific expenses, or accounting choices that obscure your true operating performance.
Why You Need a QoE Report Even If You Are Not Selling
Most business owners assume quality of earnings reports are strictly for M&A transactions. Yet waiting until you’re ready to sell means discovering problems when it’s too late to fix them—and when those problems directly reduce your sale price.
A proactive QoE serves as a strategic diagnostic tool. It exposes blind spots in profitability, cash flow, and operational risk that standard financials miss entirely. Think of it like getting a comprehensive health checkup before symptoms appear: the goal is prevention and optimization, not crisis response.
Here’s what a QoE reveals that your regular financials don’t:
- Hidden profitability drains: Expenses buried in cost of goods sold or overhead that erode margins without clear visibility
- Revenue quality issues: Whether your growth is sustainable or driven by factors that won’t repeat
- Cash flow disconnects: Situations where reported profits don’t translate to actual cash in the bank
- Operational risks: Dependencies on key employees, customers, or vendors that create vulnerability
This intelligence becomes the foundation for better decision-making, whether you’re planning to sell in five years, seeking financing, or simply trying to build a more valuable business.
Strategic Benefits of a Proactive Quality of Earnings Review
Beyond transaction preparation, a quality of earnings review delivers actionable insights that improve how you run your business today.
Clarity on True Profitability
A QoE analysis reveals which revenue streams actually contribute margin versus those that might be masking losses. You might discover that your fastest-growing service line is actually your least profitable—information that changes how you allocate resources and pursue new business.
Tax Planning Opportunities
The normalization adjustments in a QoE often reveal tax savings or restructuring opportunities. When you understand which expenses are truly operational versus discretionary, you can work with your tax advisor to optimize your structure accordingly.
Operational Bottleneck Identification
QoE findings frequently pinpoint expense categories, staffing inefficiencies, or overhead items that drain cash flow without corresponding value. This diagnostic function alone often pays for the cost of the analysis.
Exit Readiness and Valuation Insight
Even if a sale is years away, a QoE gives you a baseline valuation and highlights exactly what to fix before going to market. Addressing these issues proactively—rather than under the pressure of due diligence—typically results in higher valuations and smoother transactions.
Stronger Position for Financing or Investment
Lenders and investors trust normalized earnings far more than raw financial statements. A quality of earnings report strengthens your credibility in capital conversations, often resulting in better terms and faster approvals.
Common Adjustments in a Quality of Earnings Analysis
Normalization adjustments restate your earnings to reflect true operating performance. Understanding these common adjustments helps you anticipate what a QoE will examine.
Owner Compensation Normalization
If you pay yourself significantly above or below market rate, the QoE adjusts your compensation to what a replacement manager would cost. This adjustment often has the largest impact on normalized EBITDA for owner-operated businesses.
One-Time or Non-Recurring Expenses
Lawsuit settlements, pandemic-related costs, relocation expenses, or other anomalies that won’t repeat get removed from normalized earnings. However, be prepared for scrutiny—buyers and analysts are skeptical of items labeled “one-time” that seem to recur annually.
Related Party Transactions
If you rent your building from yourself, purchase services from a family member’s company, or have other related party transactions, these get adjusted to fair market value. The goal is showing what the business would look like under independent ownership.
Revenue Recognition and Timing Adjustments
Aggressive or inconsistent revenue booking practices get corrected to show accurate timing. This is particularly relevant for service businesses with project-based revenue or those navigating ASC 606 compliance.
When to Get a Quality of Earnings Report
Timing matters when it comes to QoE analysis. While there’s rarely a wrong time to understand your true financial position, certain moments make the investment particularly valuable:
- Annual strategic planning: Use QoE findings to inform next year’s growth priorities and resource allocation
- Before seeking financing: Strengthen your position with lenders or investors by presenting normalized, verified earnings
- After major business changes: Post-acquisition integration, new revenue streams, or leadership transitions all warrant fresh analysis
- Two to three years before a potential exit: This timeline gives you room to address issues that would otherwise reduce valuation
The worst time to get a QoE? When a buyer requests one during due diligence and you’re seeing the findings for the first time alongside them.
How to Use QoE Findings to Build Enterprise Value
A quality of earnings report isn’t just a diagnostic—it’s a roadmap for increasing your business’s value. The findings tell you exactly where to focus your improvement efforts for maximum impact.
Start by prioritizing fixes based on their effect on normalized EBITDA. Margin improvements, revenue diversification, and cleaning up accounting practices typically offer the highest return on effort. Then, track your progress over time to demonstrate improvement trends that buyers and investors find compelling.
The QoE identifies the problems, but translating those findings into an actionable growth plan requires connecting financial insights to operational decisions. Which investments will improve margins? How do you reduce customer concentration without sacrificing growth? What’s the right pace of change given your cash position?
Tip: Document the improvements you make after receiving QoE findings. When you eventually go to market—or seek financing—you’ll have a clear narrative showing how you identified and addressed weaknesses proactively.
Build Financial Clarity Before You Need It
The businesses that command premium valuations and attract serious buyers share one characteristic: they understand their true financial position long before anyone asks. They’ve identified their risks, addressed their weaknesses, and can present a clean, credible financial story with confidence.
Waiting until you’re ready to sell—or until a lender demands it—puts you in a reactive position. You discover problems when stakes are highest and time is shortest. Proactive quality of earnings analysis, by contrast, gives you the clarity and runway to build a genuinely more valuable business.
Talk to an expert at Bennett Financials about getting a quality of earnings review tailored to your growth goals—whether you’re planning an exit or simply want to understand what your business is really worth.
FAQs About Quality of Earnings Reports
How much does a quality of earnings report cost?
Costs vary based on business complexity, revenue size, and scope of analysis. For businesses in the $1M to $10M revenue range, the investment is meaningful—though the insights often prevent far larger losses or missed opportunities. Think of it as due diligence on your own company.
How often should a business owner get a QoE report if not planning to sell?
Most growth-focused owners benefit from a quality of earnings review every two to three years, or after significant business changes like acquisitions, new service lines, or leadership transitions. This cadence maintains accurate insight into true profitability without excessive cost.
Who provides quality of earnings reports?
QoE reports are typically prepared by CPA firms, transaction advisory practices, or CFO advisory firms with experience in due diligence and business valuation. The key is finding a provider who understands your industry and can translate findings into actionable recommendations.
Can a business owner prepare a quality of earnings analysis internally?
While you can start identifying potential adjustments internally, an independent quality of earnings provider adds credibility and catches blind spots that insiders often miss. For financing or sale purposes, third-party verification carries significantly more weight.
What is the difference between a buy-side and sell-side QoE report?
A buy-side QoE is commissioned by a buyer to validate a target company’s earnings—often with an incentive to find problems that justify price reductions. A sell-side QoE is prepared by the seller to proactively identify and address issues before going to market, putting you in control of the narrative.
