Disclaimer. This page is educational only. It is not investment, legal, tax or lending advice, and it is not a substitute for full due diligence with your own lender, attorney and CPA. Every decision is yours.
A quality of earnings review, or QoE, is an independent look at whether a business really earns what the seller says it earns. It is usually done by an accounting firm on the buyer's behalf, after the letter of intent is signed and before closing.
What a QoE looks at. The work varies by firm and by scope, but it commonly includes:
- Tying earnings to the records. Reconciling the reported financial statements to tax returns and bank deposits.
- Testing the add-backs. Checking each adjustment the seller made to earnings, and whether it is real, one-time or discretionary, and supported by documents.
- Revenue and customers. How concentrated revenue is, whether it is recurring, and any unusual swings.
- Working capital. What a normal level looks like across the year, which feeds the working capital terms of the deal.
What a QoE is not. It is not an audit, and it is not a legal, tax or operational review. It does not tell you whether the price is right or whether to buy. It gives you a clearer picture of the earnings you are paying for.
Do I need one? It depends on the size and complexity of the deal, the quality of the seller's records and what your lender requires. Some lenders ask for one on larger loans; others do not. Ask your lender at the start, and ask several firms for a scope and a quote. For a smaller deal, a narrower review of the books by your own CPA may be a reasonable alternative. That is a decision to make with your advisors.
My view from the sell side. The most useful thing a seller can do is walk through, line by line, which add-backs a lender and a QoE will actually accept. As a buyer, you can do the same work before you sign the LOI. If an add-back cannot be tied to a document, assume it will not survive diligence, and price your offer accordingly.
Try it on your own numbers. The free Add-back checker walks you through each adjustment so you can test the earnings before you commission a review. Any adjustment you apply is yours to set from your own research. It is for analysis and education, not a buy or pass signal.
Frequently asked questions
What is a quality of earnings review?
An independent review, usually by an accounting firm, that tests whether a business's reported earnings and add-backs hold up against its records.
Is a QoE the same as an audit?
No. A QoE focuses on the earnings and adjustments behind the price. It is not an audit and not a legal or tax review.
Does an SBA lender require a QoE?
It depends on the lender and the deal. Ask your lender early what it requires.
Disclaimer. This page is educational only. It is not investment, legal, tax or lending advice, and it is not a substitute for full due diligence with your own lender, attorney and CPA. Every decision is yours.