What Is a Quality of Earnings (QoE) Report?
A Quality of Earnings (QoE) report is a financial analysis conducted during due diligence that verifies and adjusts an agency's reported earnings to determine sustainable, recurring profitability. It's the buyer's tool for separating real earnings from noise.
What a QoE Analysis Examines
- Revenue quality: What percentage is recurring (retainers) vs. project-based? Are there revenue recognition timing issues?
- Expense normalization: Identifying one-time costs, above-market owner compensation, personal expenses, and related-party transactions
- EBITDA adjustments: Validating the seller's add-backs to arrive at true adjusted EBITDA
- Customer metrics: Client retention rates, revenue per client trends, client lifetime value
- Working capital trends: Is the agency generating cash or consuming it?
When QoE Reports Are Used
Most commonly in deals above $2M in enterprise value, especially when the buyer is a private equity firm or a strategic acquirer with institutional backing. For smaller deals, a lighter financial diligence process may substitute.
Impact on Agency Sellers
A QoE report can adjust your EBITDA up or down by 10–30%. Sellers who prepare clean, auditable financials with well-documented add-backs fare much better. Surprises during QoE — undisclosed liabilities, aggressive revenue recognition, inflated add-backs — erode buyer trust and kill deals.
Related terms: Adjusted EBITDA, Working Capital Adjustment, Seller Discretionary Earnings
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