Quality of Earnings, Explained

What it is

A QoE report answers one question: how much of this company's reported profit is real, recurring, and transferable to a new owner? It starts from reported earnings and adjusts, removing one-time events, normalizing owner compensation to market, adding back personal expenses, and flagging anything a buyer's economics wouldn't include.

How it differs from an audit

An audit asks whether financial statements follow accounting rules. A QoE asks whether the earnings are durable. A company can pass an audit while its QoE reveals that a third of its profit depends on one customer, an under-market owner salary, and a legal settlement that will never recur. For deal purposes, the second document is the one that matters.

The adjustments that matter most

Owner add-backs, personal vehicles, travel, family members on payroll, legitimately increase adjusted earnings when documented, and evaporate when they aren't. Revenue recognition timing, related-party transactions, and deferred maintenance are the usual downward adjustments. The net of these adjustments produces adjusted EBITDA: the number the purchase price is actually multiplied from.

Why sellers commission their own

A sell-side QoE, prepared before going to market, lets the seller find and frame every issue before a buyer's team does, and substantiate every add-back with evidence rather than assertion. Because price is a multiple of adjusted earnings, every dollar of defended add-back returns several dollars of price. Few documents in a transaction carry that leverage.