7 min read · 760 words
At a glance
- A Quality of Earnings report, a QoE, is where a buyer’s accountants test whether your reported profit is real, repeatable, and yours to sell. It’s the exam behind most private-company deals.
- Most owners have never seen a QoE until a buyer’s version is used to re-price them. By then it’s the buyer’s document, built to find reasons to pay less.
- You can run the exam on yourself first. A sell-side QoE prep at a regional firm typically runs $25,000 to $75,000; catching what it would catch, early, is worth far more than that in price protected.
If you’re going to sell, the single most useful thing to understand is the test your numbers will actually face, because almost every private-company sale runs through some version of it. This piece explains what a Quality of Earnings checks, why owners fail it on numbers they thought were fine, and why running it on yourself first changes the outcome.
What is a Quality of Earnings, really?
It’s not an audit. An audit asks whether your statements follow the rules. A QoE asks a sharper, more commercial question: is this profit real, will it repeat for a new owner, and can every dollar of it be traced and trusted. A buyer commissions it to decide what he’s actually willing to pay, and his QoE is built by people whose job is to find every reason the number should be lower.
It normalizes your earnings, strips out what won’t recur, tests your revenue for consistency, examines your margins for truth, and pressure-tests your working capital. The output is a number, usually a normalized EBITDA, that the buyer trusts more than your reported profit, and the deal gets priced off that number, not yours.
Why do owners fail it on their own numbers?
Because their numbers were built to record, not to survive this exact exam, and nobody ever ran the exam on them. The failure isn’t dishonesty. It’s that the questions a QoE asks were never anyone’s job to answer. The specific places owners get caught:
- Margins that move when split apart. A blended margin that looks fine until the QoE breaks it out by product or customer and the losers appear.
- Revenue recognized inconsistently. The same kind of sale booked differently across the year, so the trend the buyer wanted to pay for can’t be trusted.
- Add-backs that don’t survive. Half the owner’s adjustments struck, dropping normalized earnings and, at the multiple, the price.
- Working capital that can’t be reconstructed. Cash and receivables that don’t tie out cleanly, forcing conservative assumptions that cost the seller.
- A one-time item that isn’t. The “unusual” expense that shows up every year, quietly making the real earnings lower than presented.
Each finding does two things: it lowers the number, and it lowers trust in every other number, which lowers it again. That compounding is why a QoE surprise is so expensive.
Why run it on yourself first?
Because the same exam, run early and on your side, converts every one of those findings from a discount into a fix. Found in the buyer’s QoE, a mispriced line is his to use against you. Found in your own, months ahead, it’s a pricing correction that lifts the trend he’ll eventually pay for. Same finding, opposite value, and the only difference is who ran the exam first and when.
There’s a timing dimension too. A QoE reads a trailing period, so fixes made today don’t fully show until they’ve aged into the track record. Running the exam early is the only way to have the corrected numbers behind you by the time a buyer looks. Every month you wait moves that date out.
Where this leads
A QoE is the concentrated version of the whole exit question: are your numbers believable to a stranger writing a check. It ties directly to surviving diligence, the add-backs a buyer will believe versus strike, and the diagnosis underneath, books built to record, not to decide.
The Sellable-Numbers Scan runs the buyer’s exam on your side, in dollars, before the buyer does. In 14 days, we show what a QoE would re-price and what the company is worth once the numbers can be believed, with a simple guarantee: at least 3x the Scan fee in owner-accepted value identified, or you pay nothing.
If that’s the question in front of you, book a fit call. Thirty minutes, no pitch.
Russell Fette · Decisive Finance · Creator of Financial Rhythms™