Quality of Earnings Services for Business Acquisitions

A quality of earnings report evaluates whether a target company’s reported earnings reflect recurring, sustainable operating performance. It typically examines revenue quality, margins, expenses, cash conversion, working capital, and proposed EBITDA adjustments. Unlike a financial statement audit, a QoE report is designed to inform a transaction decision rather than provide an audit opinion.

A quality of earnings analysis helps buyers test the financial assumptions behind valuation and financing. Seller financial statements may be accurate for accounting purposes while still containing non-recurring income, discretionary expenses, customer concentration, unusual timing effects, or unsupported add-backs. The review gives the buyer a clearer basis for evaluating sustainable post-close performance and transaction risk.

The agreed scope may include executive findings, a reported-to-normalized EBITDA bridge, revenue and margin analysis, customer concentration, cash-flow observations, working capital analysis, debt-like items, seller questions, and transaction considerations. Exact deliverables depend on the company’s business model, available records, deal structure, review period, and the needs of the buyer or financing source.

Normalized EBITDA begins with reported EBITDA and adjusts for items that may not represent the company’s expected ongoing operations. Each adjustment should be identified, quantified, and tested against supporting records. The analysis may address owner compensation, related-party costs, unusual income or expenses, accounting classifications, and defensible pro forma changes. The appropriate treatment depends on the facts of the target business.

Commonly reviewed add-backs include excess owner compensation, personal or discretionary expenses, one-time professional fees, litigation costs, related-party rent, non-recurring gains or losses, and proposed cost savings. An add-back is not accepted solely because it appears in the seller’s schedule. Its amount, supporting evidence, recurrence, and relevance to post-close operations must be assessed.

An audit primarily evaluates whether financial statements are presented in accordance with the applicable accounting framework and may result in an audit opinion. A QoE review focuses on the economics of a transaction: recurring earnings, normalized performance, working capital, cash conversion, and deal-specific risks. Quality of earnings services do not replace an audit, legal review, or tax advice.

Yes. A QoE review is often a central component of financial due diligence, but the terms are not always interchangeable. Broader financial due diligence may also evaluate debt and debt-like items, capital expenditure requirements, balance-sheet exposures, forecasts, and other transaction matters. Tax, legal, commercial, operational, cybersecurity, and regulatory diligence normally require separate scopes and qualified specialists.

Many engagements can be completed within approximately two to six weeks, but the actual timeline depends on data availability, accounting quality, company complexity, number of entities, requested analysis period, management responsiveness, and financing requirements. The schedule and preliminary-finding checkpoints should be agreed before work begins. Missing or unreconciled records may extend the review.

QoE report cost is determined by scope rather than a universal price. Relevant factors include company size, transaction complexity, number of legal entities and locations, quality of bookkeeping, available monthly data, urgency, review period, required working capital analysis, and lender support. OGScapital reviews the available information before providing a defined scope, fee estimate, and delivery schedule.

The initial request commonly covers monthly income statements, balance sheets, cash-flow statements, general ledger, trial balance, tax returns, bank statements, receivables and payables aging, customer-level revenue, payroll, contracts, debt schedules, forecasts, and seller-proposed EBITDA adjustments. The first discussion can take place before the data room is complete so critical gaps and priority requests can be identified early.

It can influence the discussion, but a price reduction is not guaranteed. Findings may support the proposed valuation, identify a different earnings basis, inform the working capital peg, change financing assumptions, or lead to revised terms, protections, or post-close priorities. The report provides evidence for the buyer’s acquisition decision; the commercial outcome remains subject to negotiation and the full diligence record.

This page is focused on buy-side quality of earnings for acquirers evaluating private companies. If you require sell-side or pre-sale financial analysis, OGScapital can first review the transaction objective, available records, independence considerations, and required deliverables to confirm whether an appropriate scope can be offered. The engagement type should be clearly defined before documents are exchanged.

An accelerated review may be possible when the transaction deadline, priority questions, available data, and seller response process are understood at the outset. The scope can be sequenced so potentially material findings are discussed before the final report. Feasibility depends on record quality and complexity, so timing should be confirmed directly rather than assumed from a standard turnaround estimate.