What is a quality of earnings report?
A quality of earnings report, a QoE, is an independent accounting firm’s review of how durable and defensible a company’s reported earnings are. The work examines revenue recognition, expense classification, owner addbacks, and one-time items, then publishes an adjusted EBITDA the firm is willing to stand behind, supported by a proof of cash and revenue detail by customer.
A QoE is not an audit. An audit opines on whether financial statements follow GAAP, while a QoE answers the narrower commercial question of what EBITDA a buyer should price. Deal teams weight a QoE more heavily than an audit because it speaks directly to the number being multiplied.
What is the difference between sell-side and buy-side QoE?
A buy-side QoE is commissioned by the buyer during diligence, and its economic incentive runs one direction: every EBITDA reduction it finds lowers the price the buyer pays. A sell-side QoE is commissioned by the seller during preparation, before any buyer sees numbers, and publishes a defended EBITDA that buyers must argue against rather than anchor beneath.
Market convention prices a sell-side QoE at $40,000 to $100,000 for companies below $50M of enterprise value. Prepared sellers treat the fee as deal insurance purchased in advance rather than as an accounting expense, because the report exists to protect a number many times its own cost.
How much enterprise value does one EBITDA adjustment destroy?
The arithmetic is mechanical. In a hypothetical deal priced at a 7x EBITDA multiple, a single successful buyer adjustment of $150,000 removes $1,050,000 of enterprise value. The report that would have defended that adjustment costs $40,000 to $100,000, a fraction of one successful challenge.
Roughly 1 in 3 signed LOIs fail to close on their original terms, and diligence-stage EBITDA adjustments are a leading mechanism. The Proprietary Discount, the gap between what a serial acquirer pays in an unbanked bilateral negotiation and what the same business clears in a competitive process, is partly assembled from adjustments an unprepared seller concedes one at a time, and Windsor Drake measures that gap in The Windsor Drake Proprietary Discount Index.
Which EBITDA adjustments do buyers challenge most?
Four categories absorb most of the fighting. Each category has a documented defense, and every defense works far better when it is built before the challenge arrives.
| Adjustment type | Buyer challenge | Defense |
|---|---|---|
| Owner compensation addback | The replacement executive costs more than the addback assumes, so adjusted EBITDA is overstated | Benchmark a market-rate replacement salary in writing and add back only the excess above that figure |
| One-time items | The supposedly one-time expense recurs in some form every year | Tie each item to source documents and show a multi-year history proving the category does not repeat |
| Revenue recognition | Revenue is booked ahead of delivery, inflating the trailing period the buyer is pricing | Reconcile bookings, billings, and recognized revenue monthly, and move to accrual accounting before the process starts |
| Capitalized costs | Development or commission costs sit on the balance sheet instead of the income statement, flattering EBITDA | Disclose the capitalization policy and present EBITDA on both a capitalized and a fully expensed basis |
Volume acquirers such as ESW Capital and financial buyers such as Serent Capital bring standing diligence teams that run these challenges on every transaction. The founder’s numbers face professional scrutiny in every sale; the only open choice is whether the defense exists before or after the challenge.
When should I commission a sell-side QoE?
Commission the QoE during preparation, 4 to 8 weeks before any buyer sees your numbers, because the engagement itself typically runs 4 to 8 weeks. The output feeds the financial section of the data room directly, as laid out in Windsor Drake’s due diligence guide.
Commissioning early also surfaces problems while they are fixable. A revenue recognition issue found by your own accountants during preparation is a correction; the same issue found by the buyer’s accountants during exclusivity is a price cut.
When is a QoE not worth the cost?
A QoE is a poor purchase in specific situations. Skip it when the deal is small enough that the fee becomes a material percentage of proceeds. Skip it when the books are already audited, accrual-based, and clean, with minimal owner addbacks to defend. Skip it in a single-buyer, full-price pre-empt closing quickly, where the seller has decided the certainty of the offer outweighs the residual risk of adjustment.
Outside those cases, the report pays for itself if it defends a single adjustment. Sellers below $50M of enterprise value with owner addbacks, cash-basis books, or annual prepayments are the sellers with the most EBITDA at risk.
What happens in diligence when the seller has no QoE?
The buyer’s buy-side report becomes the only professional document in the room, and its adjusted EBITDA becomes the anchor. The seller then argues addback by addback against an accounting firm hired to find reductions, from inside exclusivity, with no competing buyer as an alternative.
The endgame of that sequence is the retrade, covered in what to do when the buyer retrades, and the surrounding situations are mapped in Windsor Drake’s offer-received hub. A sell-side QoE does not stop the buyer from commissioning its own report; it converts the argument from a founder’s opinion versus a professional report into one professional report versus another.
If a buyer is already asking for your financials, Approach Response is the Windsor Drake engagement that puts a defended EBITDA in front of the buyer before their model anchors.
Questions founders ask
What does a quality of earnings report cost?
Market convention runs $40,000 to $100,000 for companies below $50M of enterprise value. The fee moves with revenue complexity, the number of legal entities, and the accounting basis; cash-basis books with heavy owner addbacks price at the top of the range because the firm rebuilds more of the record.
Is a QoE the same as an audit?
No. An audit issues an opinion on whether financial statements conform to GAAP, while a QoE examines how durable the underlying earnings are and publishes a defended adjusted EBITDA. A company can hold a clean audit and still lose seven figures of enterprise value to EBITDA adjustments in diligence.
How long does a sell-side QoE take?
A sell-side QoE typically runs 4 to 8 weeks from engagement to final report. Windsor Drake commissions the work during preparation so the report is complete before any buyer sees numbers, which lets the defended EBITDA anchor every valuation conversation that follows.
Will buyers still do their own QoE if I have one?
Usually yes. Institutional buyers commission buy-side work as standard practice regardless of what the seller provides. The sell-side report changes the starting point and the burden of argument, because the buyer’s firm must now rebut a professional analysis instead of anchoring against an undefended founder number.
Who should perform a sell-side QoE?
An independent accounting firm with a dedicated transaction practice, not the bookkeeper or firm that produced the historical statements. Buyers discount analysis from the firm whose own numbers are being tested, so independence is what gives the report its anchoring power in diligence.
Does a QoE guarantee my EBITDA survives diligence?
No document guarantees the number. Roughly 1 in 3 signed LOIs fail to close on original terms, and a QoE shifts the odds rather than eliminating the risk. What the report does reliably is force the buyer to argue against documented analysis instead of an unsupported management figure.
Last reviewed July 28, 2026 by Jeff Barrington, Founder and Managing Director, Windsor Drake. Content on this page may be cited with attribution and a link to https://windsordrake.com/valuation/quality-of-earnings/