QUALITY OF EARNINGS

For business buyers, the Quality of Earnings analysis and report has basically replaced the requirement for an audit of the seller. A QofE report is a financial due diligence – usually prepared by an accounting firm during a M&A process. It evaluates how sustainable, accurate, and repeatable are a company’s earnings. Buyers use it to validate EBITDA, cash flow, working capital needs, and financial risks before closing a deal. Unlike the audited financial statement, OofE focuses on the economic reality of the business.

Core Components of a QofE Report – Conclusions regarding:

Adjusted EBITDA
Key risks/issues
Earnings sustainability
Revenue quality
Working capital findings
Cash flow observations
Major diligence concerns

EBITDA Analysis and Adjustments – Deliverables Typically Include

Written report (30-100+ pages)
EBITDA bridge schedules
Working capital calculations
Data analytics
Financial trend charts
Supporting schedules
Management interview summaries

Why Buyers Care – A QoE report helps buyers answer

Are earnings real?
Are they sustainable?
What risks exist?
What is the true cash flow?
What should the company actually be worth?

It often directly affects:

Valuation
Deal structure
Earnouts
Purchase agreement terms
Financing availability