Quality of Earnings
(QofE) for M&A

A Quality of Earnings (QoE) report is an in-depth analysis that evaluates the financial performance and earnings sustainability of a business. It helps buyers and investors understand the true earnings power of a company by identifying adjustments for non-recurring, non-operational, or unusual items.

The cost varies based on the complexity of the business, the scope of the analysis, and the size of the transaction. Generally, prices can range from $10,000 to $100,000 or more for larger transactions.

QoE reports are critical for M&A transactions as they provide transparency and help uncover potential risks or opportunities. They ensure that buyers and sellers have a clear, accurate view of the company’s financial health, which is vital for informed decision-making.

QoE reports are most commonly used by:
- Buyers (e.g., private equity firms, strategic buyers) in an M&A transaction.
- Sellers preparing for a sale to maximize their business value.
- Lenders evaluating the financial health of a business for financing purposes.

A QoE report typically includes:
- Adjusted EBITDA analysis.
- Revenue trends and customer concentration analysis.
- Cost structure evaluation.
- Normalized working capital assessment.
- One-time or non-recurring expense adjustments.
- Identification of risks or irregularities in financial reporting.

Common adjustments include:
- Removing one-time or non-recurring expenses (e.g., legal settlements).
- Adjusting for non-operational income or expenses (e.g., rental income from unrelated properties).
- Correcting errors or inconsistencies in financial records.
- Accounting for owner-specific expenses not transferable to a buyer.

A QoE report focuses on the sustainability and quality of earnings, whereas an audit ensures the accuracy and compliance of financial statements with accounting standards. Audits are primarily backward-looking, while QoE reports aim to provide insights for future decision-making.

Buy-side QoE reports are prepared for buyers to identify potential risks and validate the seller’s financial claims.

‍Sell-side QoE reports are prepared for sellers to address potential buyer concerns upfront, streamline due diligence, and maximize transaction value.