Quality of Earnings (QoE)
In-depth analysis commissioned by the buyer to verify the quality, recurrence, and reliability of a business's reported earnings. It's the most rigorous financial examination you'll face during a sale.
Definition
The quality of earnings (QoE) is a detailed financial analysis report, usually prepared by an accounting firm hired by the buyer. Its goal: to validate that the EBITDA and earnings presented by the seller are real, recurring, and sustainable. The QoE goes beyond a traditional accounting audit — it examines the quality of revenue, the normalization of expenses, profitability trends, and hidden financial risks.
In French-language Quebec documentation, you’ll see quality of earnings used for the same concept (the English term is used as-is).
In other words, the QoE answers the question every buyer asks: “Do the numbers being presented to me really reflect the economic reality of this business?”
Why quality of earnings matters in a business sale
The QoE typically happens during due diligence, after a letter of intent (LOI) has been signed.
For you as a seller, it’s a critical moment — the QoE’s conclusions can confirm the negotiated price, or justify renegotiating it downward.
The analyst will examine every normalization adjustment you applied to EBITDA. A $250,000 owner salary normalized to $120,000? They’ll want to see market comparables.
Personal expenses removed? They’ll verify piece by piece. Non-recurring revenue excluded? They’ll validate that it effectively won’t return.
Quebec SMEs that keep rigorous books and whose normalization adjustments are well documented move through the QoE smoothly.
Those with gray areas — poorly documented cash revenue, mixed personal/business expenses, or creative accounting — will see their EBITDA revised downward. And a downward-revised EBITDA means a downward-revised sale price.
What every seller should know
- The QoE is paid for by the buyer, but you’re the one who has to provide the documents and answer the questions. Preparing an organized file ahead of time speeds up the process.
- EBITDA normalization adjustments have to be backed by documentary evidence — invoices, contracts, bank statements. Undocumented adjustments will be rejected.
- A QoE that surfaces negative surprises is the leading cause of transactions failing during due diligence. Transparency from the start is your best protection.
- Discussing the adjustments you plan to make with your broker before going to market lets you anticipate what the QoE will reveal and avoid unpleasant surprises.