// THE DEAL DESK
Quality of Earnings
An independent accounting analysis that tests whether reported earnings reflect sustainable, recurring operating performance — typically commissioned under exclusivity and delivered in three to six weeks.
The QoE is the instrument that validates the price. But it is commissioned after a price has been indicated, which means the deal team commits before the instrument finishes running.
The analysis is sound. The sequencing puts it after the verdict.
// WHAT IT ACTUALLY COVERS
Three layers, routinely conflated
Only the third genuinely requires a full engagement. Pricing all three as though they were attestation is what pushes verification downstream of the decision it exists to inform.
- 01
Reconciliation
Does the adjusted EBITDA match across every document?
The CIM, the financial model, the management presentation and the lender deck should carry the same number. Where they disagree, the disagreement is the finding — regardless of which document turns out to be right. This requires no new data request and no three-week engagement.
- 02
Substantiation
Does each adjustment trace to the ledger and survive a widened window?
A summary schedule prepared by a sell-side advisor is an assertion; the general ledger is the record. And recurrence is only visible on a long enough look-back — an item that is non-recurring across the seller’s chosen period frequently is not across the full one. Moderate effort, and where most surprises actually surface.
- 03
Attestation
Is this an independent opinion a lender and a board can rely on?
The formal accounting product. This is the layer that genuinely requires three to six weeks and a qualified firm, and it is the only one that should. Software does not produce an attestation, and any tool claiming otherwise is overreaching.
// HOW IT GETS MISPRICED
Scrutiny allocated inverse to risk
A platform acquisition justifies the engagement fee. A bolt-on at a fraction of the size does not — the cost would be a meaningful percentage of the equity, and the deal team has three other processes running.
But the larger target has been prepared for sale by a banker: professionally assembled bridge, conventional adjustments, complete data room. The smaller one is often owned by a founder with a part-time bookkeeper and an advisor who has done six deals. Informal bridge, unexamined add-backs, no working-capital analysis.
Scrutiny is allocated to the deals most likely to survive it. That is not a failure of judgment — it is what happens when the only available instrument is priced as a late-stage engagement.
The full argument — what the current sequence costs at the LOI, and how the error compounds across a buy-and-build — is in Quality of Earnings Arrives After the Verdict.
// QUESTIONS
Common questions
- What is a quality of earnings report?
- A quality of earnings analysis is an independent accounting review testing whether reported earnings reflect sustainable, recurring operating performance rather than one-off items or accounting choices. It is typically commissioned under exclusivity and delivered in three to six weeks, at a cost usually running from five figures into six on larger transactions.
- What does a QoE actually examine?
- Three things, though they are frequently conflated. Reconciliation asks whether the adjusted EBITDA is consistent across the CIM, the model, the management presentation and the lender deck. Substantiation asks whether each add-back traces to ledger entries and survives a widened look-back period. Attestation is the formal independent opinion a lender or board relies on. Only the third genuinely requires a full engagement.
- Why do small acquisitions rarely get a quality of earnings review?
- Because the engagement cost is a meaningful percentage of the equity on a smaller transaction. A platform acquisition justifies the fee; a bolt-on at a fraction of the size does not. The difficulty is that scrutiny then runs inverse to risk — the larger target has been professionally prepared for sale, while the smaller one often has an informal bridge, unexamined add-backs and no working-capital analysis.
- Can screening replace a quality of earnings engagement?
- No. It changes what the engagement is for. Screening — reconciliation and substantiation — is cheap, fast, and belongs before the letter of intent, so that the QoE confirms a thesis you have already tested rather than discovering one you have already priced. Attestation stays where it is. The two are different products, and treating them as one is what pushes verification downstream of the decision.
// SCREEN BEFORE YOU COMMIT