Quality of Earnings (QoE)
A quality of earnings report is an independent accountant's deep dive into whether the seller's reported earnings are real. You hire a third-party firm to stress-test the numbers behind a deal: the revenue, the margins, and especially the add-backs that build SDE or EBITDA. The output is a clear-eyed read on the cash flow you're actually buying.
Why it matters to a buyer
The CIM and the tax returns tell the seller's version of the story. A QoE checks it. It catches owner add-backs that don't hold up, revenue that was pulled forward or one-time in nature, customer concentration buried in the detail, and margins propped up by accounting choices. Since your price and your financing both ride on the earnings number, a QoE is how you confirm you're not overpaying for earnings that won't repeat.
How it's different from an audit
An audit asks "are these statements accurate per accounting standards?" A QoE asks a sharper question for a buyer: "what are the normalized, sustainable earnings a new owner can count on?" An audit looks backward at compliance. A QoE looks forward at what you're buying. Most small-business sellers have never been audited anyway, so a QoE is usually your best independent check.
When it's worth it
A QoE runs anywhere from a few thousand dollars on a small deal to $25,000+ on a larger one. That's real money, so the rule of thumb: get one once you're under LOI and serious, scaled to deal size. On a $500K deal you might do a lighter scope. On a $5M deal, skipping it to save $20K is a false economy (the report routinely pays for itself by catching an inflated SDE before you close).