In recent years, stricter due diligence has reshaped dealmaking. Studies show that buyers now walk away from nearly 65% of potential M&A deals after initial financial screening. The reason? Unverified numbers and questionable earnings quality. That’s why a quality of earnings checklist has become a must-have for every serious M&A buyer.

A buy-side quality of earnings analysis is the backbone of M&A financial due diligence. It digs deeper than standard audits to confirm whether reported profits truly reflect sustainable cash flow. In 2025, QoE checklist matters more than ever as lenders tighten terms and investors demand proof behind every number.

Today’s M&A buyers face three main challenges:

  • Tougher underwriting and limited credit availability.
  • Growing pressure to validate normalized EBITDA.
  • Rising scrutiny of revenue quality and one-time adjustments.

A clear quality of earnings analysis helps buyers stay ahead by:

  • Prioritizing key data requests early.
  • Spotting anomalies in revenue, seasonality, or customer mix.
  • Aligning on a fair working capital peg before closing.

With over 70% of M&A transactions now requiring formal financial due diligence QoE, skipping it is no longer an option.

This guide explains what QoE for M&A buyers includes, accepted testing methods, typical deliverables, cost drivers, red flags, and how to select a credible QoE provider who delivers clear, actionable insights.

Why M&A Buyers Need a Quality of Earnings Review

The primary goal of a buy-side quality of earnings review is to validate a target company’s sustainable earnings. Unlike an audit, which verifies historical financial statements, a QoE report focuses on the future performance you inherit as a buyer. It provides a detailed earnings quality assessment that informs your valuation and deal structure.

Buyers use a QoE review to:

  • Validate sustainable earnings
  • Separate recurring vs. non-recurring items
  • Review revenue recognition and margin stability
  • Confirm cash conversion efficiency
  • Review working capital trends
  • Evaluate customer concentration risk
  • Adjust for seasonality to get a normalized EBITDA
  • Reconcile add-backs
  • Compare management forecasts with historical performance

Normalized EBITDA analysis findings directly influence three major deal factors:

  1. Purchase price through adjustments to reported EBITDA.
  2. Deal structure by revealing risks that may need escrows or earn-outs.
  3. Representations and warranties by identifying areas where stronger coverage protects the buyer.

QoE vs. Audit: What’s the Difference?

QoE differs fundamentally from audits and compilations. Audits verify historical compliance with accounting standards. Compilations simply organize financial data. The quality of earnings report goes deeper, testing assumptions behind accruals, examining reserves adequacy, and stress-testing key performance drivers.

AspectQoE ReviewAuditCompilation
ObjectiveAssess sustainability, cash flow, and true earningsVerify compliance with accounting standardsPresent financial data without assurance
ScopeEBITDA bridge, revenue quality, working capital, add-backsDetailed testing of all accountsNo detailed testing
UserBuyers, lenders, investorsManagement, shareholders, taxManagement only
Evidence StandardSubstantive testing with lender-ready documentationFollows audit standardsLimited evidence collection
ResultCustom, forward-looking QoE report with deal insightsStandard audit opinionBasic financial statements
Any questions? Get in touch!

    Why QoE Matters in 2025

    Access to finance is the biggest barrier to SME growth. The IFC-World Bank MSME Finance Gap Report (March 2025) shows a $5.7 trillion funding gap across 119 emerging industries. Around 40% of formal MSMEs still face credit limits. This shortage pushes lenders to demand strong QoE for M&A buyers analysis before approving capital.

    With stricter lending rules, a detailed quality of earnings review is now essential. Lenders examine every EBITDA adjustment and expect clear, verified documentation for normalized earnings calculations.

    A well-prepared QoE enables buyers to:

    • Support acquisition financing by presenting credible, normalized EBITDA.
    • Protect valuation assumptions by identifying one-time items and unsustainable margins.
    • Negotiate confidently, backed by independently verified financial adjustments.

    Key Factors Driving QoE Importance

    1. Defensible Metrics: 84% of lenders now require detailed documentation for all QoE adjustments and normalized EBITDA analysis components. Template-driven reports no longer suffice.
    1. Concentration Risks: Any customer contributing over 10% of revenue is a clear QoE red flag. A customer concentration analysis helps buyers identify dependency risks and plan for revenue diversification.
    1. Seasonality Impact: Seasonal highs can distort real profits. Buyers should normalize revenue and margins to reflect steady earnings.
    1. Backlog and Pipeline Quality: Buyer must verify order books, test contract convertibility, and confirm pipeline assumptions. High competition and inflated backlogs make this essential for accurate forecasting.
    1. Working capital discipline: Buyer should conduct a working capital analysis QoE to identify liquidity gaps, supplier payment cycles, and short-term funding needs.

    Enhanced Documentation Requirements

    Buyers expect a quality of earnings analysis that:

    1. Uses consistent documentation of revenue drivers and adjustments.
    2. Test EBITDA sensitivity to pricing, volume, and margin assumptions.
    3. Highlights QoE red flags, such as unusual vendor terms or deferred costs.
    4. Aligns accounting policies across periods for fair trend comparison.

    Average QoE Cost in the USA

    A quality of earnings report typically costs $8,000 to $150,000 or more in the United States, depending on deal size, data complexity, and business type. Understanding these pricing helps M&A buyers budget accurately during financial due diligence QoE work.

    Deal Size and Complexity Drive Pricing

    QoE costs rise with deal value and scope of analysis. Smaller deals need lighter testing, while larger ones require deeper reviews and more coordination.

    Scope ItemUnder $1M$1M – $10M$10M – $20M$20M – $30MAbove $30M
    Cost Range$8,000 – $15,000$15,000 – $30,000$30,000 – $50,000$50,000 – $75,000$75,000 – $150,000+
    Basic revenue verification✅✅✅✅✅
    Simplified EBITDA review✅✅✅✅✅
    Key expense testing✅✅✅✅✅
    Revenue testing❌✅✅✅✅
    EBITDA normalization❌✅✅✅✅
    Basic working capital analysis❌✅✅✅✅
    Add-back identification❌✅✅✅✅
    Full QoE analysis❌❌✅✅✅
    Comprehensive add-backs❌❌✅✅✅
    Working capital peg analysis❌❌✅✅✅
    Customer concentration review❌❌✅✅✅
    Multi-location reviews❌❌❌✅✅
    Detailed operational analysis❌❌❌✅✅
    Extended procedures❌❌❌✅✅
    Industry benchmarking❌❌❌✅✅
    Multi-entity consolidation❌❌❌❌✅
    Carve-outs❌❌❌❌✅
    Cross-border considerations❌❌❌❌✅
    Comprehensive risk assessment❌❌❌❌✅

    90% of the private M&A deals are below $30M, where buyers often need basic QoE reports. Larger or more complex deals, especially those with international entities or carve-outs, need advanced testing and multi-entity reviews.

    We were proud to be a trusted partner
    of Flippa.com (#1 marketplace to buy/sell online businesses) conducting buy-side due diligences for all transactions on that marketplace in the past.

    Standard Scope vs. Add-Ons

    Base fees cover different testing depths based on deal size:

    • Standard reports focus on adjusted EBITDA assistance and financial position analysis. 
    • Enhanced reports include full quality of earnings analysis, historical revenue review, business growth drivers, and working capital requirements. 
    • Web-based businesses require specialized testing including traffic verification and marketing analytics.
    Service ComponentStandard Report (<$3M)Enhanced Report (>$3M)Add-On Cost
    Adjusted EBITDA analysis✅ Yes✅ Yes—
    Normalized EBITDA calculation✅ Yes✅ Yes—
    QoE adjustments testingLimitedFull scope—
    Working capital requirementsBasicComprehensive—
    On-site visits❌ No❌ Optional$5,000 – $15,000
    Vendor calls❌ No❌ Optional$10,000 – $25,000
    Carve-out financials❌ No❌ Optional$15,000 – $30,000

    Timeline Impact on Fees

    Standard QoE engagements take two to four weeks depending on complexity. Traditional or web-based businesses with deal value under $3 million require two to three weeks, while deals above $3 million need three to four weeks. Rush delivery carries a 20% to 40% premium. Using a Quality of Earnings checklist upfront reduces delays.

    Business TypeDeal ValueReport TypeTimeline
    Traditional< $3MStandard2 – 3 weeks
    Traditional> $3MEnhanced3 – 4 weeks
    Web-based< $3MStandard2 – 3 weeks
    Web-based> $3MEnhanced3 – 4 weeks

    Deliverable Milestones

    Professional Quality of Earnings Services follow a structured process – from initial financial analysis and draft findings to management discussions and final report delivery.

    1. Draft Report: Delivered in week 2 for standard or week 3-4 for enhanced reports.
    2. Management Q&A: Conducted during week 2-3 for standard or week 3-4 for enhanced reports.
    3. Final Report: Includes executive summary, EBITDA bridge, QoE adjustments, recommendations, and detailed appendices ready for lenders.
    MilestoneStandard ReportEnhanced ReportDeliverable
    Draft ReportWeek 2Week 3 – 4Initial findings document
    Management Q&AWeek 2 – 3Week 3 – 4Q&A session and follow-up
    Final ReportWeek 3Week 4Full QoE package
    Any questions? Get in touch!

      Key Factors That Influence Qoe Price

      Multiple variables drive QoE adjustments to standard pricing. Understanding these factors helps buyers obtain accurate quotes and avoid scope creep during the engagement.

      1. Data Quality and Availability

      Clean, well-organized financial data reduces QoE costs significantly. Companies with robust accounting systems enable efficient testing procedures.

      Characteristics of a well-organized data room include:

      • Complete general ledgers with detailed transaction coding
      • Organized supporting documentation readily accessible
      • Consistent chart of accounts across all periods
      • Regular bank and account reconciliations current
      • Clear audit trails linking transactions to source documents

      Conversely, unorganized data rooms with incomplete records can increase the QoE cost by 15-25%. Missing backup documentation forces time-consuming reconstruction efforts. Poor data quality often extends timelines by two to three weeks.

      2. Industry-Specific Complexity

      Different sectors require specialized procedures that standard QoE approaches don’t cover. Industry expertise becomes critical for accurate analysis.

      Sector-Specific Requirements:

      IndustryKey QoE FocusImpact on Pricing
      SaaSChurn analysis, customer cohorts testing, deferred revenue validation, ARR/MRR reconciliationHigh
      ManufacturingCost accounting review, inventory valuation testing, overhead absorption analysis, standard cost variance examinationMedium
      RetailUtilization rate testing, project margin analysis, backlog quality validation, work-in-progress verificationModerate

      3. Multi-Entity Consolidations

      Targets with multiple subsidiaries often maintain separate accounting systems. This increases the need for reconciliations and consistency checks across ledgers.

      To ensure accuracy, the QoE provider must:

      • Align different charts of accounts.
      • Reconcile intercompany balances and eliminations.
      • Confirm consistent accounting policies and revenue cut-offs.
      • Analyze segment-level profitability to detect loss-making divisions.

      Each extra entity adds hours to the normalized EBITDA analysis and working capital analysis QoE, pushing the total cost higher.

      4. Carve-Outs

      Division or business unit carve-outs are challenging since the target may not have standalone books. Auditors must rebuild standalone financials. Carve-outs typically add 30-50% to standard QoE costs.

      Steps in a carve-out QoE include:

      1. Identify direct expenses directly attributable to the carved-out business
      2. Allocate shared costs based on appropriate allocation methods
      3. Estimate stranded costs that were previously absorbed
      4. Reconstruct standalone financial statements 
      5. Validate assumptions against industry benchmarks

      5. Revenue Complexity

      Businesses with long-term contracts or subscription models require a more detailed revenue recognition review against standards like ASC 606. This increases both timeline and cost due to key challenges like:

      • Multiple recognition methods across products.
      • Timing of cut-off testing.
      • High volume of small contracts needing sampling.
      • Seasonality or churn that complicates trend analysis.

      6. Inventory Methods

      Different valuation methods (FIFO, LIFO, or weighted average) influence cost and margin accuracy. When these methods vary across entities or years, the QoE team must verify comparability.

      Inventory testing usually includes:

      • Verifying cost flow assumptions.
      • Checking inventory write-downs and obsolescence.
      • Testing gross margin stability under different costing approaches.

      This factor has a moderate impact on financial due diligence QoE pricing.

      7. International Operations

      Cross-border operations bring additional accounting, tax, and currency risks. Multi-currency consolidation and local GAAP differences require more advanced testing which increases timeline and QoE cost.

      8. Legal and Tax Intersections

      Legal and tax intersections often trigger additional checks. Pending litigation, transfer pricing disputes, or earn-out clauses can affect normalized results.

      Extra analysis is needed when:

      • The company has open tax audits or ongoing disputes.
      • There are related-party transactions or shareholder loans.
      • SPA terms depend on QoE findings (e.g., escrow, earn-out, or indemnity).
      Any questions? Get in touch!

        Cost Breakdown by Deal Type and Industry

        Understanding the quality of earnings (QoE) checklist costs helps M&A buyers plan budgets accurately and assess provider quotes fairly. QoE report costs range from $8,000 to $150,000 or more, depending on the target company’s industry, complexity, and data room quality.

        Below is a breakdown of QoE cost patterns across major sectors:

        SaaS

        SaaS QoE costs $8,000 to $80,000 or more, based on customer volume, billing complexity, and data system quality.

        SaaS Quality of Earnings (QoE) Cost

        Recurring revenue models of SaaS need specialized testing unlike traditional businesses. Lenders mainly assess customer concentration and cohort retention to measure revenue stability.

        SaaS QoE Cost and Scope Breakdown by Target Profile

        QoE ScopeMicro SaaSSmall SaaSGrowth SaaSEstablished SaaSEnterprise SaaS
        Operation Size<100 customers100 – 500 customers500 – 1000 customers1000 – 2000 customers2000+ customers
        Annual Recurring Revenue (ARR)<$1M$1M – $10M$10M – $30M$30M – $50M>$50M
        QoE Report Cost$8,000 – $15,000$15,000 – $25,000$25,000 – $40,000$40,000 – $55,000$55,000 – $80,000+
        Revenue verification (ARR/MRR)✅✅✅✅✅
        Contract sampling & renewal testing✅✅✅✅✅
        Expense trend analysis✅✅✅✅✅
        Churn & retention analysis❌✅✅✅✅
        Deferred revenue analysis❌✅✅✅✅
        Add-back normalization❌✅✅✅✅
        Working capital review❌✅✅✅✅
        SaaS metrics (LTV/CAC, churn cohorts)❌❌✅✅✅
        Usage-based revenue testing❌❌✅✅✅
        Customer concentration❌❌✅✅✅
        Forecast validation & sensitivity❌❌❌✅✅

        Manufacturing

        Manufacturing QoE costs $25,000 to $140,000 or more, based on SKU complexity, product diversity, and facility count. 

        Manufacturing Quality of Earnings (QoE) Cost

        Manufacturing QoE focuses on inventory, cost of goods sold (COGS), and cost flow through production. A thorough working capital analysis QOE ensures the balance sheet avoids obsolete stock and gross margins remain accurate.

        Manufacturing QoE Cost and Scope Breakdown by Target Profile

        Scope ItemMicro ManufacturerSmall ManufacturerMid ManufacturerDiversified ManufacturerLarge Manufacturer with Global or Carve-out
        Operation Size1 facility, <25 SKUs1-2 facilities, 25-75 SKUs3-5 facilities, 75-150 SKUs5-10 facilities, 150-300 SKUs10+ facilities, 200+ staff
        Annual Recurring Revenue (ARR)<$1M$1M – $10M$10M – $30M$30M – $50M>$50M
        Cost Range$25,000 – $40,000$40,000 – $65,000$65,000 – $100,000$100,000 – $125,000$125,000 – $140,000+
        Revenue testing (by product line)✅✅✅✅✅
        COGS validation & margin review✅✅✅✅✅
        Normalization of owner costs✅✅✅✅✅
        Working capital analysis❌✅✅✅✅
        Inventory valuation & reserves❌✅✅✅✅
        Add-back & one-time adjustment❌✅✅✅✅
        Customer concentration analysis❌✅✅✅✅
        Plant-level profitability❌❌✅✅✅
        Equipment lease & CAPEX review❌❌✅✅✅
        Supply chain dependency mapping❌❌✅✅✅

        Retail

        Retail QoE costs $20,000 to $80,000 or more based on store count and SKU complexity.

        Retail Quality of Earnings (QoE) Cost

        Retail store-level performance and promotions need detailed testing that scales with business size. The revenue recognition review covers gift card liabilities, loyalty program accounting, and promotion timing, which can shift revenue between periods.

        Retail QoE Cost and Scope Breakdown by Target Profile

        Scope ItemBoutique RetailLocal ChainRegional ChainNational RetailerEnterprise Retail
        Operation Size1 store, 2-10 staff2-15 stores, 20-100 staff16-50 stores, 100-200 staff50-150 stores, 200-400 staff150+ stores, 400+ staff
        Annual Recurring Revenue (ARR)<$1M$1M – $5M$5M – $10M$10M – $20M$20M+
        Cost Range$20,000 – $30,000$30,000 – $40,000$40,000 – $55,000$55,000 – $70,000$70,000 – $80,000+
        Revenue validation by channel✅✅✅✅✅
        Refunds & returns review✅✅✅✅✅
        Marketing & ad spend validation❌✅✅✅✅
        SKU-level profitability❌✅✅✅✅
        Inventory reserve testing❌✅✅✅✅
        Add-backs & one-time items❌✅✅✅✅
        Marketplace vs. DTC split❌✅✅✅✅
        Customer concentration❌❌✅✅✅
        Working capital peg analysis❌❌✅✅✅
        Multi-entity consolidation❌❌❌✅✅

        Healthcare

        Healthcare QoE costs $15,000 to $100,000 or more due to its heavy regulatory environment.

        Healthcare Quality of Earnings (QoE) Cost

        Healthcare QoE analysis requires deep expertise in convoluted reimbursement models from a mix of payers. The primary risk being assessed is the collectability of revenue, which directly impacts pricing.

        Healthcare QoE Cost and Scope Breakdown by Target Profile

        Scope ItemSolo ClinicGroup PracticeMulti-site NetworkSpecialty ASC or Hospital GroupEnterprise Health Group
        Operation Size1 site, 2-5 staff2-5 sites, 5-25 staff6-10 sites, 25-75 staff10-25 sites, 75-200 staff25+ sites, 200+ staff
        Annual Recurring Revenue (ARR)<$2M$2M – $5M$5M – $10M$10M – $20M$20M+
        Cost Range$15,000 – $25,000$25,000 – $40,000$40,000 – $60,000$60,000 – $80,000$80,000 – $100,000+
        Revenue & billing reconciliation✅✅✅✅✅
        Normalization & add-backs✅✅✅✅✅
        Payor concentration analysis❌✅✅✅✅
        Working capital review❌✅✅✅✅
        Deferred revenue (prepaid packages)❌✅✅✅✅
        Aged AR analysis❌✅✅✅✅
        Seasonality & patient volume trends❌✅✅✅✅
        Lease, staffing, and compliance review❌✅✅✅✅
        Reimbursement rate testing❌❌✅✅✅
        Segment profitability❌❌✅✅✅

        Business Services

        QoE for service-based businesses cost $20,000 to $80,000 or more. 

        Business Services Quality of Earnings (QoE) Cost

        QoE for professional services depend on human capital efficiency rather than physical assets or inventory. Customer concentration analysis focuses on client tenure, renewal probability, and historical spending patterns that indicate revenue stability.

        Business Services QoE Cost and Scope Breakdown by Target Profile

        Scope ItemFreelance or Micro-agencySmall FirmMid-sized PracticeLarge FirmEnterprise or global service firm
        Operation Size<10 staff10-25 staff25-75 staff75-200 staff200+ staff
        Annual Recurring Revenue (ARR)<$500K$500K – $2M$2M – $5M$5M – $10M$10M+
        Cost Range$20,000 – $30,000$30,000 – $40,000$40,000 – $55,000$55,000 – $70,000$70,000 – $80,000+
        Revenue recognition testing✅✅✅✅✅
        Expense & payroll normalization✅✅✅✅✅
        Partner compensation adjustments✅✅✅✅✅
        WIP & unbilled revenue review❌✅✅✅✅
        Customer concentration❌✅✅✅✅
        Working capital analysis❌✅✅✅✅
        Contract backlog testing❌✅✅✅✅
        Deferred revenue validation❌❌✅✅✅
        Segment profitability❌❌✅✅✅
        Multi-entity consolidation❌❌❌✅✅
        Any questions? Get in touch!

          What’s Included in a QoE

          A quality of earnings report helps buyers assess earnings stability and detect financial risks before an acquisition. A buy-side QoE confirms revenue accuracy, tests QoE adjustments, and reconciles reported results with real economic performance.

          1. Bridge from Reported to Normalized EBITDA

          The key element of every normalized EBITDA analysis is the bridge from reported earnings to adjusted EBITDA.

          Add-backs for Normalized EBITDA:

          • Owner compensation exceeding market rates
          • Non-recurring professional fees
          • Discontinued product lines
          • One-time gains or losses from asset sales
          • Related-party transactions at off-market prices
          • Stock-based compensation
          • Above-market rent paid to related entities

          The QoE team verifies each add-back with documentation, confirming adjustments are non-recurring and properly calculated.

          2. Revenue and Margin Analytics

          These analytics test the quality, consistency, and sustainability of earnings to confirm whether revenue is stable and margins are defendable post-deal.

          Steps for Revenue and Margin Review:

          1. Compare revenue by product, customer, and geography
          2. Review margin trends across time and business units
          3. Match sales records with ledgers
          4. Identify customer concentration or churn risks
          5. Adjust for seasonality or deferred revenue

          3. Working Capital Roll-Forward and Peg Analysis

          Working capital analysis QoE measures cash required for daily operations. The roll-forward tracks changes in receivables, inventory, payables, and current accounts, establishing the working capital peg sellers must deliver at close.

          The analysis covers:

          • Monthly or quarterly balances
          • Seasonal patterns and peak requirements
          • Days sales outstanding, inventory turns, payment terms
          • Normalized working capital target

          Buyers use this data to negotiate the peg and structure adjustments if closing balances fall short.

          4. Cash vs. Accrual Tests

          These tests check if reported earnings match real cash flow. A company may show profits on paper but lose cash if receivables grow faster than sales.

          Test AreaCash BasisAccrual Basis
          Revenue RecognitionWhen receivedWhen earned
          ExpensesWhen paidWhen incurred
          EBITDA ImpactMay fluctuateMore stable

          Significant gaps require QoE adjustments to reflect actual performance.

          5. Sensitivity Analyses

          Sensitivity tests show how key assumptions affect normalized EBITDA and valuation. It covers:

          • EBITDA without top customers or contracts
          • Margin change under lower revenue
          • Working capital under delayed collections
          • Add-back changes and price impact

          6. Executive Summary with Key Findings and Red Flags

          Executive summary sums up the quality of earnings report into actionable insights, presenting adjusted EBITDA, major add-backs, and valuation concerns. It covers:

          • Final normalized EBITDA with confidence level
          • Material risks
          • Accounting concerns
          • Recommended valuation adjustments
          • Items requiring further investigation

          Buyers rely on this summary to guide negotiations, update financial models, and risk protections.

          Cheap vs. Professional QoE: What Are You Really Paying For?

          When buyers compare a low-cost, template-based report with a professional Quality of Earnings analysis, the cost gap may seem big, but the risk gap is larger. Template-based reports might look fine initially, but real problems arise later through rework, closing delays, or disputes during the Share Purchase Agreement (SPA) stage.

          Here’s what separates cheap from professional buy-side Quality of Earnings:

          Template-Driven vs. Expert QoE

          AspectTemplate-Driven QoEProfessional QoE
          Procedure DepthStandard checklists, surface-level testingSubstantive testing
          Evidence StandardsManagement interviews, high-level tie-outsSource documents, bank records, vendor invoices
          Error RatesHigh (5-10%)Low (<2%)
          Adjustment SupportVerbal explanations, weak backupsDocumented calculations, defensible bridges
          Lender AcceptanceOften requires reworkWidely accepted
          Impact on SPA TermsWeak working capital analysis, post-close disputesStrong SPA terms, defensible valuation, clean closing

          Hidden Costs of a “cheap” Financial Due Diligence QoE

          A cheap financial due diligence QoE may seem attractive at first, but it often causes:

          • Rework costs: Incomplete analysis requires additional work, increasing total costs by 30-50%.
          • Closing delays: Lender pushback on substandard reports delay closings by 2-4 weeks.
          • Post-Close disputes: Insufficient QoE documentation leads to earn-out disagreements and escrow claims.
          • Valuation impact: Missed QoE red flags can result in overpayment of 10-15% of purchase price.
          Any questions? Get in touch!

            Why Choose a Professional QoE

            A professional QoE doesn’t just validate earnings. It’s built by experienced professionals that stands up to scrutiny, avoids rework, and keeps deals on track.

            Professional QoE pays off because it:

            • Tests every key revenue stream for consistency and sustainability.
            • Builds a defensible EBITDA bridge with clear support for each adjustment.
            • Prepares a buy-side quality of earnings report that aligns with lender expectations.
            • Reduces risk of post-close surprises and supports smoother integration.

            Sample QoE Scope and Cost Scenarios

            A quality of earnings report doesn’t come in one fixed format. Its scope, cost, and timeline shift based on deal size, industry, and data complexity. Below are four practical examples showing how a QoE checklist plays out in real transactions.

            Sample 1: Small SaaS Add-On Acquisition

            A micro-PE fund acquired a niche project tracking software business with $850K ARR and a customer base of 100+ small online sellers. The team had just five employees.

            Deal Profile: $850K ARR | $12,000 cost | 2-week timeline

            Scope:

            • Basic MRR and ARR verification from Stripe and QuickBooks
            • Simplified EBITDA analysis for recurring hosting and dev expenses
            • Key expense testing on salaries and third-party APIs

            Findings: Two prepaid annual subscriptions were double-counted, overstating ARR by $30K. Some support costs were misclassified as capitalized development.

            Outcome: EBITDA adjusted down by $25K. Buyer received a $50K price concession and introduced monthly ARR reporting post-close.

            Sample 2: Multi-Plant Manufacturer

            A family office reviewed a $7.8 million metal components manufacturer operating two plants supplying regional OEM clients.

            Deal Profile: $7.8M revenue | $25,000 cost | 3-week timeline

            Scope:

            • Revenue testing by major customers and product segments
            • EBITDA normalization for owner salary and non-recurring repairs
            • Basic working capital analysis (inventory, AR, AP)
            • Add-back identification for discretionary expenses
            • Key expense testing for utilities and freight

            Findings: Owner-related payroll and vehicle expenses of $210K identified as add-backs. Inventory reserve understated by $150K.

            Outcome: Normalized EBITDA dropped by $360K. Buyer negotiated a $400K reduction and added a working capital peg to protect against overstatement risk.

            Sample 3: Multi-Site Healthcare

            A growth equity fund evaluated a seven-clinic physical therapy group generating $15 million in revenue from commercial and Medicaid contracts.

            Deal Profile: $15M revenue | $45,000 cost | 3-week timeline

            Scope:

            • Full QoE analysis with detailed revenue and expense testing
            • Comprehensive add-backs and EBITDA normalization
            • Working capital peg and AR aging analysis
            • Customer (payor) concentration and reimbursement review
            • Basic benchmarking vs. industry margins

            Findings: Two clinics showed receivables aged beyond 120 days totaling $480K. Medicaid rate cuts not reflected in forecasts. $190K in personal expenses reclassified as add-backs.

            Outcome: EBITDA lowered by $600K. Buyer reduced valuation by $900K and required monthly AR monitoring post-acquisition.

            Sample 4: Consumer Roll-Up

            A mid-market PE group analyzed a $28 million online home goods retailer operating eight brands and multiple fulfillment centers across five states.

            Deal Profile: $28M revenue | $65,000 cost | 4-week timeline

            Scope:

            • Full QoE with comprehensive add-backs and normalization
            • Working capital peg analysis and inventory valuation testing
            • Customer concentration and SKU profitability review
            • Multi-location operational analysis
            • Industry benchmarking against peer e-commerce margins
            • Extended procedures on ad spend efficiency and logistics costs

            Findings: Understated inventory reserve by $600K. Duplicated ad spend inflated expenses by $500K. Some brand-level EBITDA metrics overstated due to misallocated overheads.

            Outcome: Normalized EBITDA reduced by $1.1M. Buyer adjusted purchase price by $1.6M and set up a post-close cost improvement plan for underperforming brands.

            How to Choose the Right QoE Provider

            Choosing the right QoE provider for your quality of earnings report can make or break your deal. At OGScapital, we’ve handled over $9.0 billion in M&A transactions across 40 industries, serving 200+ due diligence clients with our 30 MBA consultants over 17 years.

            From our experience, buyers should focus on eight clear evaluation areas before engaging a QoE firm.

            Vendor Scorecard Checklist

            Evaluation Area What to Look For (Checklist)
            Sector Experience
            Proven industry experience
            Sector-specific knowledge
            Prior QoE track record
            Methodology
            Bottom-up testing of revenue, margins, and QoE adjustments
            Consistent, audit-grade approach
            Includes working capital analysis QoE
            Data Request List Quality
            Practical and realistic requests
            Aligned with deal size
            Minimizes back-and-forth
            Independence
            No prior relationship with seller
            Unbiased analysis
            QA/Partner Review
            Senior partner reviews every deliverable
            Documented quality checks
            Consistent accuracy across engagements
            Sample Reports
            Anonymized QoE report samples
            Lender-ready format with EBITDA bridges
            References
            At least three verified client references
            Positive accuracy and communication feedback
            Strong track record with lenders
            Proposal Transparency
            Clear scope and deliverables
            Transparent fees
            No hidden assumptions

            Mini RFP Checklist

            When sending out RFPs, always ask vendors these eight questions:

            1. How many similar deals has your team completed in the past few months?
            2. What specific industry risks do you test for in our target sector?
            3. Can you provide references from recent buy-side quality of earnings engagements?
            4. How do you ensure quality control and partner review of deliverables?
            5. What is your typical timeline for draft and final quality of earnings report delivery?
            6. Can you share examples of QoE red flags you’ve identified in similar deals?
            7. How do you handle additional procedures if significant issues are identified?
            8. What level of ongoing support do you provide during financing and closing?

            At OGScapital, we benchmark each proposal against these same criteria. This ensures buyers receive lender-ready deliverables, transparent pricing, and reliable insights that strengthen every deal decision.

            Frequently Asked Questions (FAQ)

            What’s the Difference Between a QoE and an Audit, and Which Does a Buyer Need?

            A Quality of Earnings (QoE) report examines financial sustainability and earnings quality. It reviews revenue recognition, working capital, and one-time adjustments. An audit verifies financial statement accuracy against accounting standards. Buyers need a QoE during due diligence to assess business quality and risks. Audits provide historical financial validation.

            How Long Does a QoE Take and What Drives the Timeline?

            A standard QoE takes two to four weeks from kickoff to draft delivery. Timeline depends on:

            • Data quality and completeness
            • Management responsiveness
            • Carve-outs complexity
            • Multi-entity consolidations
            • Depth of working capital analysis QoE

            Clean, reconciled financials with strong backup documentation accelerate the process. Rush projects can compress to two weeks but require immediate access and responsive management teams.

            Which Add-Backs Are Acceptable in a Normalized EBITDA Bridge?

            Valid QoE adjustments focus on isolating recurring performance from one-time items. Acceptable QoE adjustments in normalized EBITDA analysis include:

            • Non-recurring legal fees
            • One-time restructuring costs
            • Owner compensation above market rates
            • Extraordinary repairs
            • Discontinued product lines
            • Non-operating income or expenses

            QoE adjustments reject add-backs for recurring items like routine R&D, customer acquisition costs, or ongoing sales commissions. The working capital analysis QoE verifies that normalized EBITDA reflects true operating performance.

            How Is the Net Working Capital Peg Determined in a QoE?

            The net working capital peg in a quality of earnings report represents the agreed benchmark of working capital that the business must maintain at the time of M&A. It helps ensure the buyer receives a company with sufficient liquidity to operate without injecting extra cash post-acquisition.

            Net Working Capital Peg = ∑(Normalized Net Working Capital for Prior Periods) ÷​ Number of Periods

            Where,

            Normalized Net Working Capital = (Current Assets – Cash) – (Current Liabilities – Debt)

            If closing working capital is below Net Working Capital Peg, the seller compensates the buyer.
            If it’s above Net Working Capital Peg, the buyer pays the seller the difference.

            What Are the Most Common QoE Red Flags That Change Deal Terms?

            Top QoE red flags that trigger renegotiation include:

            • Inflated or premature revenue recognition
            • Unsupported or exaggerated QoE adjustments
            • Customer concentration risks
            • Weak margin durability
            • Inaccurate net working capital peg
            • Inconsistent cut-off testing
            • Unreconciled intercompany transactions
            • High deferred revenue or unearned income
            • Inventory obsolescence or valuation gaps
            • Poor-quality data room

            Each of these QoE red flags can trigger price adjustments, earn-out clauses, additional escrow, or tighter representations and warranties in the SPA.