Conducting pre-sale due diligence is a powerful way for a seller to enhance enterprise value while minimizing unexpected challenges. A Quality of Earnings (QOE) report can help streamline this process. The enterprise value of a business is typically based on earnings before interest, taxes, depreciation and amortization (EBITDA), free cash flow, revenue and industry and market conditions. Businesses that invest in a QOE report prior to a sale may find the resulting increase in valuation often offsets the cost of the report.

What is a Quality of Earnings Report?

A QOE report is a comprehensive assessment of a business’s earnings and financial performance. It is used to demonstrate the adjusted or normalized cash flow (detailed analysis of business revenue, expenses and normalized earnings). 

With this information, sellers can make strategic business decisions to help maximize their value during a sale or transaction. This includes:

• Identifying issues that may impact the enterprise's valuation.
• Leveraging the actionable recommendations made by the QOE provider to either address or mitigate concerns, and in return, positioning the seller more favorably.
• Offering transparency by clearly explaining how potential issues are likely to affect the business’s valuation, if they cannot be resolved beforehand. 

This comprehensive approach allows sellers to prepare effectively with a realistic understanding of the business’s true earnings.

Benefits of a QOE Report

Common benefits of a QOE report include: 

• Enhanced Credibility and Transparency - Buyers often worry about encountering unexpected issues or inaccuracies during due diligence that could signal financial misrepresentation. Providing a third-party QOE report up front demonstrates openness and builds trust, reducing the likelihood of buyers challenging the financials or seeking to renegotiate the deal.
• Streamlines Due Diligence - Due diligence is often time-consuming and can delay the transaction timeline. With a QOE report already prepared, sellers can expedite the process by offering buyers and their advisors a reliable financial analysis from a credible third party. In turn, also reducing the burden on the management team.
• Offers a Proactive Review – Conducting a QOE allows sellers to spot potential issues and correct them, prior to putting the business up for sale. For instance, if the report reveals a dependence on a single customer or questionable revenue recognition practices, sellers can take steps to resolve or address these concerns in advance, avoiding surprises during negotiations.
• Creates More Negotiation Power – For small businesses who may not have put a large focus on financial statement reporting, a QOE report provides sellers with a deeper understanding of their historical financial results, equipping them to confidently justify their asking price.
• Optimizes EBITDA – Potential buyers and their diligence providers often focus on identifying adjustments that reduce EBITDA, and consequently, the purchase price. An experienced transaction advisor will help identify, substantiate and present QOE adjustments to increase EBITDA.
• Creates Letter of Intent (LOI) Readiness – In competitive situations, buyers often request initial financial data before signing a LOI. The QOE report provides sellers accurate and reliable financial information early in the process, fostering buyer confidence and potentially leading to stronger offers and faster LOI commitments. 

A QOE provider can offer end-to-end support, from initial planning through transaction close and beyond, by fielding buyer and advisor inquiries, guiding working capital strategy and calculations, and reviewing the purchase agreement to ensure a smooth and successful outcome.

Indicators a Sell-Side QOE Report is Needed

Below are some key indicators that it may be time to consider selling your business, therefore, triggering a need for a QOE report: 

• Significant Growth – If your business has shifted from a phase of stability to rapid growth, it may be the perfect time to consider a transaction (sale or partial sale). A strong growth trajectory positions your business as an attractive candidate for private equity or strategic buyers, who are actively seeking a growing business to add to their portfolio. Taking the time to evaluate your business’s valuation and assess the current market conditions can provide valuable insights into potential exit strategies.
• Obtaining Outside Investment - Investors often require a clear, credible financial picture before committing funds. A sell-side QOE report helps validate EBITDA, uncovering value-driving adjustments and building confidence in the business’s financial integrity.
• Changes in Ownership Structure - When a shareholder exits, whether due to retirement, misaligned goals or lack of contribution, it often triggers a buyout or capital raise. A sell-side QOE report provides a clear, credible financial picture to support valuation, attract investors and facilitate a smooth transition.
• Owners' Age or Reduced Involvement - As owners near retirement or step back from daily operations, they often consider succession or exit strategies. A QOE report helps quantify the business’s earnings power and operational stability, making it easier to engage buyers or successors with confidence.
• Challenges with Cash Flow - Persistent cash burn or negative operating margins may signal the need for external capital. A QOE report can validate the underlying earnings potential and identify adjustments that clarify the business’s financial health, critical for attracting private equity or lenders.
• Debt Management - Struggles with debt repayment often point out broader financial inefficiencies. A QOE report can uncover the root causes, normalize earnings, and support decisions around refinancing, restructuring, or preparing the business for sale.
• Solvency Problems - When a company begins missing financial obligations, early intervention is key. A QOE report equips stakeholders with a detailed view of earnings quality and liabilities, enabling proactive steps toward recapitalization or strategic exit planning.

How We Can Help 

Deciding to sell your business is a big step. We perform a deep dive into historical results and consider operational context to provide you with the information you need to make the right decision. 

A comprehensive understanding of your business's earnings profile provides you with valuable insights into how potential buyers may perceive the business, an essential component of pre-sale due diligence. A QOE report equips you with the information needed to make strategic decisions about the optimal time to enter the market, effectively frame key scenarios, and address critical risk areas to strengthen the business before completing the transaction. We stand by you through the entire transaction lifecycle, providing solutions and insights you need at every stage.