What is a quality of earnings report in due diligence?

A quality of earnings (QoE) report is an independent analysis, usually performed by an accounting or transaction-advisory firm, of how real and durable a company's profits are. It's a core part of due diligence: rather than just checking whether the books follow accounting rules (an audit's job), a QoE asks whether the earnings are recurring, sustainable, and an accurate picture of the cash the business actually generates.

A QoE digs into revenue quality (recurring vs. one-time), gross-margin trends, customer concentration, working-capital needs, accounts-receivable aging, and — most importantly — the add-backs and normalizations that turn reported profit into 'adjusted EBITDA.' That adjusted EBITDA figure matters enormously, because the purchase price is usually a multiple of it.

For sellers, the QoE effectively sets your price and can make or break the deal. A buyer typically commissions a buy-side QoE after the letter of intent is signed; if it uncovers unsupported add-backs or shrinking margins, the buyer may re-trade (lower the offer) or walk. Many sellers now commission their own sell-side QoE before going to market to validate their numbers, defend their add-backs, and avoid surprises that stall the process.

You can prepare by keeping clean accrual-based books, documenting every add-back with evidence, and reconciling bank statements to your P&L well before diligence starts. A PE process typically runs about four to six months from LOI to close, and a clean QoE keeps that timeline on track. DealSeam introduces owners to qualified buyers where there's a fit; the buyer's diligence team and your own advisors handle the QoE.