Key Insight
A QoE report is not an audit. It's an adversarial investigation — the analyst's job is to find every reason the seller's numbers might not hold up.
What a QoE Report Covers
A Quality of Earnings engagement typically includes:
Revenue analysis
- Reconciliation of revenue to bank deposits and customer invoices
- Revenue concentration analysis — what percentage comes from the top 5, 10, 20 customers
- Identification of one-time, non-recurring, or seasonal revenue
- Contract review — which revenue is contracted vs. transactional
Expense analysis
- Validation of seller's add-back schedule — are the claimed adjustments supportable?
- Identification of expenses that should have been added back but weren't
- Related-party transaction review
Working capital analysis
- Determination of normalized working capital levels
- Accounts receivable aging — how much is actually collectible
- Inventory assessment — is stated inventory accurate and saleable?
EBITDA bridge
- Reconciliation from reported net income to claimed Adjusted EBITDA, with each adjustment tested
When QoE Is Required (and When It Should Be)
Standard practice on deals above $2M purchase price, particularly when SBA financing is involved.
SBA note: For SBA 7(a) acquisitions above $250K in goodwill, some lenders now require a third-party QoE or business valuation as a condition of loan approval.
On smaller deals: A full QoE may not be cost-justified (typically $8,000-$25,000 for SMB deals). The alternative is a thorough buyer-conducted financial review using the same framework — but with less independence.
Common QoE Findings
- Revenue inflated by timing: Invoices accelerated into the trailing period to inflate trailing twelve months (TTM) revenue
- Unsupported add-backs: Seller claimed $40K in personal expenses without receipts; QoE analyst can only verify $22K
- Undisclosed concentration: Top customer is 35% of revenue — not mentioned in the CIM
- Below-market owner comp: Owner pays himself $60K; replacement manager costs $110K — the real add-back is negative $50K, not positive $60K
- Working capital shortfall: Business needs $200K in working capital to operate; seller is leaving with $125K — $75K purchase price adjustment required
A buyer under LOI for a $3.2M landscaping acquisition commissioned a $15,000 QoE. The report found $180K in unsupported add-backs and a working capital requirement $95K higher than the LOI assumed. The buyer renegotiated the price down by $320K. The QoE paid for itself 21x.
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