A Quality of Earnings report is an independent financial analysis that examines the reliability, sustainability, and accuracy of a business’s reported earnings, the document that determines whether the EBITDA a seller presents is the EBITDA a buyer will accept.
The QoE is prepared by an accounting firm engaged by the buyer, though sellers increasingly commission their own sell-side QoE to control the narrative before the buyer’s version arrives. It examines revenue recognition policies, the sustainability of recurring versus one-time revenue, the validity of EBITDA adjustments, the accuracy of working capital reporting, and any accounting choices that inflate or obscure reported performance.
Findings in a QoE report become negotiating instruments. A normalized EBITDA that the buyer’s QoE reduces by 15 percent, because certain add-backs are not supported or revenue is less recurring than presented, produces a valuation reduction at whatever multiple was agreed. Sellers who have prepared their own financial information rigorously, documented every adjustment, and addressed inconsistencies before the process begins are materially less exposed to QoE findings that move the valuation.
See also: Normalized, Adjusted, or Recast EBITDA · Quality of Earnings Readiness · Clean FinancialsA QoE finding that reduces normalized EBITDA by 10 percent reduces enterprise value by a multiple of that. Preparation is the only mitigation. See how Wefinx approaches exit planning.