Posted by Jennifer M. Settles, Esq. | September 30, 2026
How to Read a Quality of Earnings Report (and Why Buyers Order One)
When someone gets serious about buying a business, they often order something called a “quality of earnings” report, usually shortened to a “Q of E” or “QoE.” If you’re selling your business, you may be surprised to find a buyer’s financial advisors digging far deeper into your numbers than your own bookkeeper ever did. If you’re buying, the report can be the difference between a smart purchase and an expensive mistake. Either way, understanding what a quality of earnings report is, and what it’s really looking for, helps you navigate the deal.
What a Quality of Earnings Report Is
A quality of earnings report is a deep financial analysis, usually performed by an accounting firm on the buyer’s behalf, that examines whether a business’s reported earnings are accurate, sustainable, and a reliable basis for valuation. It goes beyond the financial statements to test how the company actually makes money and whether the profits it reports reflect real, repeatable performance. Think of it as financial due diligence with a magnifying glass: the goal is to understand the true earning power of the business, not just the numbers on the page.
Why Buyers Order One
Buyers commission a Q of E because the purchase price is usually based heavily on the company’s earnings, often a multiple of a profit measure like EBITDA or SDE. If those earnings are overstated, inconsistent, or propped up by one-time events, the buyer could be drastically overpaying. The report protects the buyer by verifying that the earnings they’re paying a multiple of are genuine and sustainable. It also frequently surfaces issues that affect the price, the deal structure, or whether the buyer proceeds at all.
Reported Earnings vs. “Real” Earnings
A central purpose of the report is distinguishing the earnings a business reports from its true, ongoing earning power. The two can differ for many reasons: one-time windfalls or expenses, accounting choices, or revenue that isn’t likely to recur. The Q of E works to strip away the noise and identify the normalized, sustainable earnings a new owner can realistically expect. That normalized figure, not the raw reported number, is what a sophisticated buyer actually values.
What “Adjustments” Are and Why They Matter
The heart of a quality of earnings report is its “adjustments” or “add-backs” – changes that normalize earnings to reflect true operating performance. For example, a one-time legal expense might be added back because it won’t recur, while an owner’s above-market salary might be adjusted to a market rate. These adjustments can move the earnings figure significantly in either direction, and since the price often rides on a multiple of that figure, each adjustment can be worth real money. Buyers and sellers frequently negotiate hard over which adjustments and add-backs are legitimate.
Key Things a Q of E Examines
A thorough report looks at several dimensions of the business’s financial health: the sustainability and trend of revenue, the makeup of the customer base and any concentration risk, profit margins and how they’re holding up, working capital needs, the reliability of the accounting, and whether reported profits convert into actual cash. It’s less about a single number and more about building a complete, tested picture of how the business performs and whether that performance is likely to continue under new ownership.
For Sellers: Why You Should Care Before You Sell
Sellers often experience the Q of E as an invasive process that can be used to chip away at the price. The smart response is to get ahead of it. Increasingly, sellers commission their own “sell-side” quality of earnings report before going to market, so they understand how their earnings will be viewed, can document and defend their adjustments, and can fix or explain issues before a buyer’s team finds them. Surprises in a buyer’s Q of E are how sellers lose negotiating leverage; preparation is how they keep it.
For Buyers: Use It to Inform the Deal
For a buyer, the report is a decision-making tool, not just a box to check. Its findings should inform what you’re willing to pay, how you structure the deal, what protections you negotiate, and whether certain risks call for mechanisms like escrows or earnouts. A Q of E that uncovers concerning trends or unsustainable earnings might justify a lower price, a different structure, or walking away. Read it as the financial reality check it’s meant to be, and let it shape your negotiating position.
The Bottom Line
A quality of earnings report tests whether a business’s profits are real, sustainable, and a sound basis for the price—cutting through reported figures to find true earning power through a series of adjustments that can swing value meaningfully. Buyers order one to avoid overpaying and to inform the deal; sellers increasingly order their own to control the narrative and protect their price. Whichever side you’re on, understanding what the report is really measuring is central to a fair, well-informed transaction.
If you’re preparing to buy or sell a business, understanding how a quality of earnings analysis will treat the numbers can protect your price and your position. Schedule a free consultation to talk through how to prepare for or make use of a quality of earnings report. Contact us at www.jsettleslaw.com or (602) 617-3938.
About the Author
Jennifer M. Settles makes business owners’ lives easier. As a fractional General Counsel with 25+ years structuring M&A deals, commercial contracts, corporate governance, and complex real estate transactions, including over two decades as lead in-house transactions counsel for major corporations, she brings big-firm firepower to the founders, dealmakers, and growing companies who need it most. Clients describe her as knowledgeable, refreshingly direct, and relentlessly focused on their best interests. Jennifer offers white-glove, direct-access service and transparent, predictable fees. Learn more or schedule a consultation.
