The quality of earnings review is the centerpiece of confirmatory diligence in most acquisitions above a million dollars: an independent accountant's examination of whether the earnings the price is based on are real, recurring, and correctly measured.
It is not an audit, and the difference matters. An audit asks whether the financial statements follow accounting standards; a QoE asks whether the earnings would continue under a new owner.
What a QoE examines
- Revenue recognition: is revenue recorded when it is really earned?
- Proof of cash: do reported revenues reconcile to bank deposits?
- Add-backs: is each owner adjustment legitimate and documented?
- Customer concentration and revenue durability
- Normalized working capital and its seasonal swings
- One-time items: are they truly one-time?
- Related-party transactions and off-market arrangements
QoE vs. audit vs. compilation
| Review type | Question it answers | Typical use |
|---|---|---|
| Compilation | Are the numbers assembled in statement form? | Bookkeeping output, no assurance |
| Audit | Do statements follow GAAP, materially? | Compliance, larger-company reporting |
| Quality of earnings | Are the earnings real, recurring, and transferable? | M&A diligence and lender comfort |
What it costs and how long it takes
For small business and search fund acquisitions, QoE engagements commonly run from around $15K for focused reviews to $75K+ for full-scope work on larger or messier targets, over three to six weeks of fieldwork and reporting.
The variables that drive cost are the quality of the target's records and the responsiveness of document flow. Clean books and a well-organized document set can cut both the fee and the timeline meaningfully.
How sellers should prepare
Sellers who reconcile their P&L to tax returns and bank statements before going to market, document every add-back with receipts, and organize monthly financials in the diligence room take the drama out of QoE. The review then confirms the story instead of rewriting it.
The worst QoE outcomes come from surprises, and almost every surprise was knowable in advance. A sell-side QoE, done before listing, is increasingly common for exactly this reason.
Next steps
FAQ
Who pays for the quality of earnings review?
The buyer, typically, since it protects their investment thesis. Sellers sometimes commission their own sell-side QoE before marketing to find and fix issues first.
Do SBA lenders require a QoE?
Not universally, but many lenders require one or an equivalent reviewed financial package on larger acquisition loans, and buyers' investors frequently require it regardless.
What happens if the QoE finds problems?
Common outcomes are price adjustments, structure changes like larger seller notes or escrows, expanded reps and warranties, or, for material misstatements, termination.