A Quality of Earnings (QoE) report is an independent financial analysis that verifies whether a target acquisition’s reported earnings are accurate, sustainable, and repeatable.

Think of it as a financial health check before you buy a business. The seller says the company makes $500,000 per year. But is that number real? Will it continue after you take over? A QoE report answers these questions.

QoE separates one-time windfalls from money the business makes consistently. It identifies expenses the current owner pays that you won’t have to, and vice versa.

The report is typically prepared by an independent third party (usually a CPA or financial analyst) during the due diligence phase, after you’ve signed a Letter of Intent (LOI) but before you close the deal.

Why Do I Need a Quality of Earnings Analysis?

You’re about to hand over a significant amount of money for a business. The target acquisition’s profit and loss (P&L) statement looks solid. So why spend more money on a QoE? Because sellers, even honest ones, often present financials in the best possible light.

A business owner might include personal expenses in the books (car payments, family cell phone plans, vacations disguised as business travel). They might have landed a one-time large contract that inflated last year’s revenue. Or they could be using accounting methods that make profits appear higher than they actually are.

A QoE report protects you by:

Validating earnings: Confirming that the reported income actually matches bank deposits and cash flow
Exposing one-time events: Identifying revenue spikes or cost savings that won’t repeat
Revealing owner-specific expenses: Showing what costs will disappear (or appear) under new ownership
Supporting deal negotiations: Giving you leverage to renegotiate the purchase price if the numbers don’t hold up
Satisfying lenders: Most SBA lenders and banks require a QoE for acquisition financing

Skipping a QoE to save a few thousand dollars can cost you hundreds of thousands if the earnings aren’t what they seem.

What is Covered in a QoE Report?

A QoE report breaks down the financial health of a business into key areas. Each section helps you understand whether the earnings are real, repeatable, and worth the asking price.

Adjusted EBITDA

EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It’s the most common metric used to value small businesses. However, raw EBITDA rarely tells the full financial story.

Adjusted EBITDA strips out one-time expenses, owner perks, and non-recurring revenue to show what the business actually earns on a normalized basis. This is the number that determines what you should pay.

Common adjustments include:

Owner salary above (or below) market rate
Personal expenses run through the business
One-time legal fees, moving costs, or equipment purchases
Non-recurring revenue from a one-off project or client
Rent adjustments if the owner owns the property

Our team at WebAcquisition calculates adjusted EBITDA for the past two fiscal years plus year-to-date (YTD), giving you a clear picture of earnings trends.

Proof of Cash

Proof of cash answers a simple question: Does the money in the bank match what the P&L says?

This analysis reconciles reported revenue with actual bank deposits. It catches discrepancies such as unrecorded income, timing differences, or, in the worst cases, fabricated sales.

For cash-heavy businesses (restaurants, retail, service companies), proof of cash is critical. The IRS reports that cash-intensive businesses have higher rates of underreported income, making this verification essential.

Working Capital

Working capital is the cash needed to run the business day-to-day. It’s calculated as current assets (cash, inventory, accounts receivable) minus current liabilities (accounts payable, short-term debts).

Why does this matter to you as a buyer?

Most deal structures require the seller to leave a “normal” level of working capital in the business at closing. If they drain the bank account or let receivables pile up before handing over the keys, you’ll be short on operating cash from day one.

A QoE report establishes what “normal” working capital looks like, typically a 12-month average, so you don’t inherit a cash-strapped business.

Balance Sheet

The balance sheet shows what the business owns and owes. A QoE analysis reviews it for:

Accounts receivable quality: Are customers actually paying? How old are the outstanding invoices?
Inventory accuracy: Is the inventory valued correctly, or is it obsolete and overstated?
Hidden liabilities: Are there debts, deferred taxes, or pending obligations not clearly disclosed?
Asset condition: Are the fixed assets (equipment, vehicles) in working order or due for replacement?

These details directly impact what the business is worth and what you’ll need to invest post-acquisition.

Other Risk Areas

Beyond the numbers, a good QoE report flags operational risks that could affect future earnings:

Customer concentration: If one client accounts for 30%+ of revenue, losing them could sink the business
Vendor dependency: Reliance on a single supplier creates risk if terms change or they go out of business
Contract terms: Are key contracts transferable to a new owner? Do any expire soon?
Seasonality: Does the business have predictable cash flow, or are there major swings throughout the year?

WebAcquisition’s team reviews contracts and agreements to identify financial implications that could impact the target company’s earnings. These factors may not show up on a P&L, but they directly affect whether earnings will continue after you take over.

Not sure if you need a full QoE or a lighter review? WebAcquisition offers both a comprehensive QoE Report and a cost-effective QoE Lite Report for buyers who need quick financial clarity without the full analysis.

How to Do a Quality of Earnings Analysis: 6 Step Process

Understanding the QoE process helps you know what to expect, whether you’re doing preliminary checks yourself or hiring a professional.

Step 1: Understand the Business

Before touching a single spreadsheet, you need to understand how the business actually makes money.

This means reviewing:

The business model and revenue streams.
Key products or services and their profit margins.
Customer base and how sales are generated.
Industry trends and competitive landscape.
The owner’s involvement in day-to-day operations.

A content website earning through display ads operates very differently from an Amazon FBA business or a SaaS company with recurring subscriptions. The QoE approach must match the business model.

Step 2: Gather Financial Data

Next, collect all relevant financial documents from the seller. At minimum, you’ll need:

Profit and Loss (P&L) statements for the past 2-3 years.
Balance sheets for the same period.
Cash flow statements.
Bank statements (12-24 months).
Tax returns (to cross-check reported income).
Accounts receivable and payable aging reports.

For online businesses, you’ll also want access to payment processor reports (Stripe, PayPal, Shopify), ad network dashboards (Google AdSense, Mediavine), and platform analytics.

The more complete the data, the more accurate your analysis will be. Missing documents are a red flag.

Step 3: Conduct a Preliminary Analysis

With documents in hand, perform a high-level review to spot obvious issues before diving deep.

This includes:

Comparing reported revenue to bank deposits; do they match?
Scanning for unusual spikes or dips in revenue or expenses.
Checking if gross margins are consistent or fluctuating wildly.
Identifying any large, one-time transactions.

Think of this as a quick health screening. If something looks off, you know where to focus your detailed analysis.

Buyers should always verify financial claims independently rather than relying solely on seller-provided documents. This preliminary check is your first layer of verification.

Step 4: Adjust Financial Statements

This is where the real work happens. You’ll go line by line through the P&L and adjust for items that don’t reflect the actual, ongoing earnings of the target acquisition.

Common add-backs (expenses that increase adjusted EBITDA):

Owner’s salary above market rate.
Personal expenses (vehicles, travel, family payroll).
One-time professional fees (legal, consulting).
Non-recurring repairs or equipment purchases.

Common subtractions (items that decrease adjusted EBITDA):

Below-market owner salary (you’ll need to pay someone more).
One-time revenue that won’t repeat.
Expenses the seller covered personally that you’ll need to pay.

The goal is to arrive at a normalized EBITDA that reflects what the business will earn under your ownership.

Step 5: Perform Detailed Analysis

With adjusted financials in place, dig deeper into the specific risk areas covered earlier:

Proof of cash: Reconcile every revenue line item with actual bank deposits.
Working capital: Calculate the 12-month average and compare it to what the seller plans to leave at closing.
Accounts receivable: Age the receivables and assess collectability.
Customer concentration: Calculate revenue percentage from top customers.
Contract review: Identify key agreements and confirm they transfer with the sale.

This step often uncovers issues that weren’t visible in the preliminary review. A customer who represents 40% of revenue might be on a contract that expires in 60 days. That’s critical information.

Step 6: Prepare the Report (PDF + Excel Workbook)

The final step is compiling your findings into a clear, actionable report. A professional QoE report typically includes:

Executive summary: Key findings and recommendations at a glance.
Adjusted EBITDA schedule: Line-by-line adjustments with explanations.
Working capital analysis: Normalized working capital target for closing.
Risk factors: Customer concentration, contract issues, operational concerns.
Supporting schedules: Proof of cash, receivables aging, and monthly trends.

The best reports include working Excel files alongside the PDF summary. This transparency lets you see exactly how the numbers were calculated and use the data in negotiations.

Preparing for a QoE Analysis: What Buyers and Sellers Need to Know

Whether you’re buying or selling, preparation makes the QoE process faster and smoother. Here’s what each side should have ready.

For Buyers

Your job is to request the proper documents and ask the right questions.

Documents to request from the seller:

Monthly P&L statements (last 24-36 months).
Balance sheets for the same period.
Bank statements from all business accounts.
Tax returns (last 2-3 years).
Accounts receivable and payable aging reports.
Major contracts (customer agreements, vendor contracts, leases).
Payroll records and contractor payments.

Questions to ask before the analysis begins:

Has there been any significant one-time revenue or expenses in the past two years?
Are there any pending legal issues, disputes, or outstanding liabilities?
What’s the owner’s actual time commitment to the business?
Are all key contracts transferable to a new owner?

The SBA recommends that buyers “ask questions about contracts, leases, existing cash flow, and inventory” when evaluating any business acquisition.

For Sellers

A well-prepared seller speeds up due diligence and builds buyer confidence.

Get your documents organized before listing:

Clean up your bookkeeping, separate personal and business expenses.
Reconcile bank statements with your accounting software.
Document any one-time expenses or unusual revenue clearly.
Prepare explanations for any major fluctuations in revenue or costs.

Be ready to explain:

Why revenue increased or decreased in specific months.
What expenses a new owner won’t need to pay (and which ones they will).
Customer concentration and contract renewal timelines.
Your actual role and hours worked in the business.

Sellers who proactively prepare a “seller QoE” or have clean financials often command higher multiples. Buyers pay more when they trust the numbers.

Disorganized financials, on the other hand, slow down deals and create doubt. Even if the business is solid, messy books make buyers nervous, and nervous buyers either walk away or negotiate harder.

Hire WebAcquisition To Perform Your Quality of Earnings Analysis

Doing a QoE yourself is possible, but it takes time, accounting knowledge, and experience spotting red flags that don’t show up on a spreadsheet. That’s where WebAcquisition comes in.

Our team has performed due diligence on over 1,000+ businesses since 2008. We’ve analyzed online businesses (e.g., SaaS, eCommerce, media) to all types of physical service companies (e.g., law firms, dental offices, HVAC and all types of service businesses). Our advisors actively buy and sell businesses themselves, so we know exactly what to look for.

What you get with a WebAcquisition QoE Report:

Normalized EBITDA analysis for the past two fiscal years plus year-to-date.
Revenue and expense verification against actual bank deposits.
Working capital assessment with recommended closing targets.
Customer concentration and contract risk analysis.
Cash flow quality evaluation.
Clear PDF report with supporting Excel workbooks.

We deliver reports within 2-3 weeks. Need it faster? Expedited delivery is available in as few as 7 business days.

Looking for a lighter option? Our QoE Lite Report provides quick financial insights with working Excel files and concise commentary, ideal if you need a rapid assessment.

Every report is customized to the specific business and model, no templates, no generic checklists.

Frequently Asked Questions

When is a QoE report needed?

A QoE report is needed after you’ve signed a Letter of Intent (LOI) but before closing the deal. This due diligence window is your chance to verify the seller’s financial claims. You should get one when the purchase price is significant, you’re financing through an SBA loan or bank (most lenders require it), or when the business has complex or fluctuating financials.

How long does a QoE analysis take?

Most QoE reports take 2-3 weeks to complete after all requested documents are received. The timeline depends on how quickly the seller provides records and the complexity of the business.

How much does a QoE cost?

QoE pricing varies based on the complexity and scope of the engagement. For small business acquisitions, expect to pay anywhere from $6,000 for lighter reviews to $10,000+ for comprehensive reports on complex businesses. Learn more about the QoE cost breakdown here.

Takeaways

A Quality of Earnings report verifies whether a business’s earnings are real, sustainable, and worth the asking price. It examines adjusted EBITDA, proof of cash, working capital, balance sheet items, and operational risks like customer concentration.

The process involves understanding the business, gathering financial data, making adjustments for one-time items and owner-specific expenses, and compiling findings into a clear report. For any acquisition where the stakes are significant, a QoE is essential due diligence, not an optional extra.

Whether you’re a first-time buyer or an experienced acquirer, having a professional review the numbers protects you from overpaying or inheriting hidden problems.

WebAcquisition has performed due diligence on over 1,000 businesses and delivers customized QoE reports within 2-3 weeks.

We offer two types of QoE:

Full QoE – You will receive a deep-dive Excel Workbook and PDF analysis report. This is the gold standard
QoE Lite – covers the major aspects in a deep dive Excel workbook. Commentary is included inside the workbook. No PDF report.

Reach out with details about your acquisition and we can provide a quote for our services.

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