A quality of earnings report (commonly called a QofE) is one of the most consequential documents produced during the sale of a privately held business. It shapes how the buyer evaluates the business, how the price is set, what adjustments are negotiated at closing, and what survives in dispute after the deal is signed. Most owners encounter a QofE for the first time only when their advisors recommend commissioning one, and the framing of those advisor conversations determines whether the document becomes a useful planning tool or just an expensive line item.
This guide walks through the topics that families and owners typically review with their advisors before commissioning a QofE, before delivering one to a prospective buyer, and during the negotiations that follow. The intent is educational: to help you understand the questions to ask and the topics to clarify with the licensed professionals advising on your specific situation. None of this is a substitute for that advice.
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What a Quality of Earnings Report Is
In the broadest framing, a QofE is an independent analysis of a business's reported earnings that adjusts for non-recurring items, accounting choices, owner-specific expenses, and other factors that affect what a buyer can reasonably expect the business to earn going forward. The result is often called normalized or adjusted EBITDA, and it differs from the EBITDA shown on the audited financial statements.
A QofE is not an audit. An audit verifies that the financial statements fairly represent the financial position of the business under accounting standards. A QofE goes further, asking whether the earnings, as reported, are sustainable, repeatable, and reflective of the underlying business operations. It is forward-looking in a way audits are not.
The role this document plays in a sale process is significant. Buyers and their lenders rely on the QofE for valuation. Negotiations about price, working capital targets, and earnout structures often hinge on QofE findings. Disputes after closing frequently trace back to assumptions in the QofE.
Topics that owners often want to clarify with their advisors before going further include the difference between a buy-side QofE (commissioned by the buyer) and a sell-side QofE (commissioned by the seller), and whether commissioning one as the seller is appropriate for your specific situation.
Why Owners Often Commission a Sell-Side QofE
When a buyer commissions a buy-side QofE, the seller is in a reactive position. The buyer's analysts surface adjustments, surprises, and concerns. The seller's team responds. The buyer drives the agenda.
A sell-side QofE flips that dynamic. The seller has a QofE in hand before negotiations begin. The analysis has been done with the seller's data, by analysts the seller selected, with adjustments documented and defensible. Buyers still commission their own diligence, but the conversation now has a baseline document the seller helped shape.
Topics families typically review with their advisors before deciding whether to commission a sell-side QofE include:
- The size of the deal and the likelihood of multiple bidders
- The time pressure on closing
- Whether the audit history is current and clean
- The complexity of the revenue model
- Whether owner add-backs are material to the picture
- The expected cost of the QofE versus its likely impact on terms
The decision is not automatic. For some transactions, the buy-side QofE the buyer will commission anyway is sufficient. For others, a sell-side QofE is meaningful enough to commission deliberately.
Topics to Review With Your Tax and Accounting Advisors
The accounting work behind a QofE rests on choices made years before the sale process begins. Topics families often review with their tax and accounting advisors include:
Revenue recognition consistency. Has the business recognized revenue the same way over the period the QofE will analyze? Changes in revenue recognition policy create adjustments that affect normalized earnings substantially.
Inventory accounting choices. Has the business used the same inventory method consistently? LIFO/FIFO changes, write-downs, and reserve adjustments all affect the QofE's view of sustainable earnings.
Capitalization policies. What has been capitalized versus expensed over time? Differences in capitalization policy between the business and industry norms surface as QofE adjustments.
Reserve practices. Bad debt reserves, warranty reserves, return reserves. Aggressive or conservative reserving practices both produce QofE attention.
Related-party transactions. Sales to or purchases from related parties at non-market terms produce adjustments. Owner-related expenses (cars, travel, family salaries) are the most common category.
Non-recurring items. One-time gains and losses, legal settlements, insurance recoveries. Each gets identified and either added back or excluded.
Resources from the AICPA cover the professional standards behind quality of earnings work in detail. Standards bodies like the IRS publish guidance relevant to specific tax treatments that affect the analysis.
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Topics to Review With Your Investment Banker or M&A Advisor
If a banker or M&A advisor is involved in the transaction, they typically have a strong view on QofE strategy. Topics worth clarifying with them include:
Timing. When in the process should the QofE be commissioned? Too early and changes during the sale period invalidate findings. Too late and the buyer has already formed views.
Provider selection. Which firms produce QofE work the buyer's universe respects? A QofE from an unfamiliar provider may be discounted by sophisticated buyers, regardless of the underlying analysis quality.
Scope. What time period does the QofE cover? Trailing 12 months, trailing 36 months, monthly versus quarterly granularity. The scope affects cost and the picture the report draws.
Add-back negotiation strategy. Which owner expenses are likely to be accepted by buyers as legitimate add-backs versus rejected? The banker's experience with comparable deals shapes this view.
Use in the offering process. How will the QofE be shared with prospective buyers, and at what stage? Strategic versus full-process versus auction dynamics each call for different approaches.
These topics are specific to the transaction and the banker's perspective. Asking them in advance shapes how the rest of the QofE work proceeds.
Topics to Review With Your Legal Counsel
The legal review of QofE work is sometimes overlooked, but topics worth clarifying with M&A counsel include:
Representations and warranties exposure. The QofE adjustments often surface items that affect rep and warranty language in the purchase agreement. Counsel typically wants visibility into QofE findings before drafting reps and warranties.
Indemnification scope. Items adjusted in the QofE may also affect indemnification language. The interplay between rep-and-warranty insurance, indemnification baskets and caps, and QofE findings is specific to each deal.
Disclosure schedules. Many QofE adjustments produce information that should appear in disclosure schedules attached to the purchase agreement. Coordinating between the QofE provider and the legal team prevents gaps.
Post-closing disputes. QofE findings frequently form the basis of post-closing disputes (working capital adjustments, indemnification claims). Counsel typically wants the QofE work to support the seller's positions in any dispute that follows.
The coordination between the QofE provider, the accounting team, the banker, and counsel is one of the topics where advisors with significant transaction experience add the most value.
Topics to Review With Your Wealth Advisor
The wealth side of the QofE conversation is often deferred, but topics worth raising with a wealth advisor early include:
Estimated net proceeds modeling. The QofE shapes the price and the structure. The structure shapes the after-tax proceeds. Modeling the post-tax outcome under several QofE scenarios helps the family plan for the actual liquidity event.
Reinvestment planning. What will the proceeds be reinvested into, and on what timeline? This affects decisions about deal structure (cash versus rollover equity, escrow holdbacks, seller financing).
Charitable timing. Some families coordinate charitable contributions around the sale to manage the tax impact. QofE timing affects when these decisions can be made meaningfully.
Estate planning interactions. A business sale often triggers estate planning conversations that should happen before the sale closes. The wealth advisor's view of these typically depends on the QofE-driven proceeds estimate.
Coordinating the wealth advisor with the deal team early prevents post-close planning regret. A common pattern, well-documented in industry guidance from organizations like NACVA, is for the wealth advisor to be brought in too late to shape decisions that materially affect the family's position.
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Topics to Clarify Before the Buyer's QofE Arrives
Even with a sell-side QofE in hand, the buyer will commission their own diligence. Topics families often clarify in advance include:
What surprises the buyer might surface. The seller's accountants usually have a view on which areas the buyer's diligence team will probe most aggressively. Knowing these in advance prevents surprises in the data room.
How to respond to adjustments the seller disagrees with. Some buyer-side adjustments are legitimate; others are negotiation positions. Having a framework for distinguishing them in advance keeps the response measured.
Working capital target methodology. Many deals fight over working capital adjustments at closing. The methodology used to set the target is often visible in the QofE findings, and clarifying it in advance reduces dispute.
Earnout structures and metrics. If earnouts are part of the structure, the QofE definitions often drive the earnout measurement. Topics include which version of normalized EBITDA controls, what adjustments are permitted post-close, and how disputes get resolved.
The SEC publishes investor education materials on M&A topics that pair well with these advisor conversations. The educational framing is consistent: ask questions, understand the structures, do not delegate the decision-making entirely.
Coordinating Across Advisors
A theme through every section above is the importance of advisor coordination. The accountant, banker, lawyer, and wealth advisor each have views on the QofE that affect the others. Without coordination, families often end up with advisors working from different versions of the picture, which produces avoidable conflict during negotiations.
A simple framework families have used:
- Identify the lead advisor for QofE strategy (often the banker, sometimes the accountant for smaller deals).
- Schedule a coordination call before commissioning the QofE that includes the wealth advisor.
- Share the QofE findings with all advisors when they arrive, with time to absorb before negotiation begins.
- Re-coordinate at major points in the process (offer received, LOI signed, before close).
This framework does not require any single advisor to manage the others. It does require the family to take responsibility for the coordination, which is often the role the family is least prepared for and most needs help with.
The Capivise advisor match service is one resource families use to find advisors with significant experience in coordinating transactions of this kind. Additional questions to ask an advisor help families evaluate fit before engagement.
A Note on Educational Framing
This guide intentionally frames everything as topics to discuss with advisors rather than as positions or recommendations. Quality of earnings work is technical, fact-specific, and shaped by the unique circumstances of each business and each transaction. There is no general guidance that substitutes for the work of advisors who know the specific business, the specific buyers, and the specific structure on the table.
Families that approach the QofE conversation with a clear set of topics to clarify - rather than positions they are defending - tend to get more useful advice from the professionals they engage. The same advisors who can produce excellent guidance when asked the right questions can produce thin or misaligned guidance when the questions are not asked.
For broader context on coordinating an advisor team during a business sale or other liquidity event, the Capivise business sale advisor resources cover the topics families typically explore. The Capivise homepage collects related educational resources across the major liquidity events families plan around.
A Short Checklist
If you are about to commission a QofE or about to receive one, these are the topics worth surfacing with your advisors first:
- Does a sell-side QofE make sense for this transaction, and if so, when in the process?
- Which provider should produce the work?
- What time period and scope should the QofE cover?
- Which accounting choices over the analysis period might produce adjustments?
- How will owner add-backs be presented and defended?
- How will the QofE interact with rep-and-warranty insurance and indemnification?
- How will the QofE findings affect working capital and earnout mechanics?
- What is the after-tax impact of likely deal structures the QofE will support?
- How will all the advisors coordinate around the findings?
Each topic above is a starting point for a conversation, not an answer. The answers depend on the specific situation, and the conversations should happen with licensed professionals familiar with your facts.
The QofE is one of the more technical pieces of a business sale, and the technical depth is exactly why advisor coordination matters. A family that goes into the process informed about the topics to clarify - and prepared to ask questions until each one is clear - is in a substantially stronger position than one that delegates the entire conversation to a single advisor.
