Quality of Earnings work is often discussed as if every QoE report serves the same purpose. But a seller preparing a company for market and a buyer evaluating an acquisition are approaching the same financial information from very different perspectives.

A seller wants to understand the questions buyers are likely to raise, support the company’s financial story, and address potential issues before they disrupt the transaction.

A buyer wants to test that story.

That means evaluating whether reported earnings are sustainable, whether proposed adjustments are supportable, how effectively earnings convert to cash, and whether financial or operational risks could affect the economics of the deal.

The underlying company may be the same, but the decision each party needs to make is different. That distinction shapes the timing, scope, analysis, and practical use of a Quality of Earnings report.

What Is a Quality of Earnings Report?

A Quality of Earnings report is a transaction-focused financial analysis designed to help users understand the earnings and operating performance behind a business.

Rather than looking only at reported net income or EBITDA, a QoE analysis may examine areas such as:

• Revenue and margin trends
• Recurring versus nonrecurring earnings
• Proposed EBITDA adjustments
• Customer concentration
• Cash conversion
• Working capital
• Revenue recognition and cut-off
• Unusual or related-party transactions
• Recent operational changes

The exact scope depends on the company, available information, and transaction.

A QoE Is Not an Audit or Valuation

This distinction is important.

An audit is designed to provide an opinion on whether financial statements are presented fairly, in all material respects, under the applicable financial reporting framework.

A Quality of Earnings analysis serves a different purpose. It focuses on financial information through the lens of a transaction and the questions that matter to the buyer or seller.

It is also not a business valuation.

QoE findings can influence assumptions used in valuation or negotiations, but the report itself does not determine what a company is worth.

Think of it as a decision tool: one that helps transaction participants better understand the financial performance they are relying on.

What Is a Sell-Side Quality of Earnings Report?

A sell-side QoE, sometimes called a vendor QoE, is commissioned by the seller, generally before or early in the sale process.

Its primary advantage is preparation.

Instead of waiting for a buyer’s diligence team to identify questions, management can examine the company’s earnings, working capital, financial records, and supporting schedules before the transaction timeline becomes more demanding.

Preparing the Financial Story Before Diligence

Buyers will want to understand how the company generates revenue, where margins come from, which expenses are recurring, and how historical earnings relate to future performance.

A sell-side QoE gives management an opportunity to prepare for those questions.

This can include:

• Developing consistent revenue and margin analyses
• Identifying unusual historical periods
• Reviewing proposed earnings adjustments
• Understanding customer concentration
• Documenting working-capital trends
• Identifying gaps in financial reporting

The goal is not to make the company look better than it is.

The goal is to make the financial story clear, supportable, and consistent with the underlying records.

Testing Management’s Adjustments

Management may believe certain expenses should be excluded when presenting normalized earnings.

Some may be legitimate nonrecurring items. Others may involve owner-specific expenses, related-party transactions, recent operational changes, or proposed run-rate adjustments.

A sell-side QoE provides an opportunity to test whether those adjustments are:

reasonable, documented, consistently calculated, and reproducible.

That can matter when buyers later evaluate the same adjustments independently.

Finding Problems Before the Buyer Does

Reporting inconsistencies, missing schedules, unusual receivable balances, unsupported adjustments, or unexplained margin changes can slow diligence and create uncertainty.

Finding these issues earlier gives management more time to understand them, correct what can appropriately be corrected, and prepare supporting information.

In that sense, one of the most valuable outputs of sell-side QoE may be fewer avoidable surprises.

What Is a Buy-Side Quality of Earnings Report?

A buy-side QoE is commissioned by the buyer as part of financial due diligence.

Here, the perspective changes.

The buyer is not primarily preparing the company’s financial story. The buyer is independently evaluating whether that story supports the assumptions behind the proposed transaction.

Are the Earnings Sustainable?

Suppose an acquisition model depends on a certain level of adjusted EBITDA.

The buyer needs to understand what sits behind that number.

A buy-side QoE may evaluate questions such as:

• How much revenue is recurring?
• Are margins stable?
• Are proposed EBITDA adjustments supportable?
• Is recent growth sustainable?
• Is the business dependent on a small number of customers?
• Are there unusual transactions affecting reported performance?
• How effectively do earnings convert into cash?

This can help distinguish accounting results from the underlying economic performance the buyer expects to acquire.

Testing the Assumptions Behind the Deal

A buyer may also focus the scope of the QoE around its specific investment thesis.

For example, if the transaction depends heavily on customer retention, customer concentration and revenue trends may deserve additional attention.

If the company is highly seasonal, working capital may become particularly important.

If debt will be used to finance the acquisition, cash generation and the sustainability of earnings may require additional scrutiny.

The objective is not simply to find problems. It is to determine whether the financial assumptions being used to make the investment decision hold up under analysis.

Sell-Side vs. Buy-Side QoE: The Main Differences

The easiest way to understand the distinction is to compare the perspective of each party.

Neither perspective is inherently “better.” They exist to support different decisions.

How Normalized Earnings Are Evaluated

Normalized earnings are often central to both types of QoE.

Reported results may contain items that do not necessarily represent ongoing operations. Analysis can therefore involve distinguishing recurring performance from unusual or nonrecurring activity.

Potential areas of review include:

Recurring vs. Nonrecurring Items

Was an expense genuinely unusual, or is it likely to occur again?

Owner-Specific and Related-Party Expenses

Does the historical cost structure reflect how the business is expected to operate under new ownership?

Run-Rate Adjustments

Have recent changes actually produced measurable results, or does the adjustment depend primarily on an expectation about the future?

Revenue Recognition and Cut-Off

Was revenue recorded in the appropriate period, and are unusual transactions influencing the historical trend?

The important principle is that an adjustment should not be accepted simply because it increases adjusted EBITDA.

Adjustments should be supportable and reproducible.

A seller may prepare them. A buyer may challenge them. The underlying financial evidence matters to both.

Why Working Capital Matters

Earnings are only part of the transaction story.

A profitable company still requires sufficient working capital to operate after closing.

QoE analysis may therefore examine accounts receivable, inventory, accounts payable, deferred revenue, seasonality, and other operating balances to understand what a normal level of working capital looks like.

From the Seller’s Perspective

The objective is generally to prepare a defensible view of normal working capital and explain unusual balances, seasonality, growth, or recent operational changes.

From the Buyer’s Perspective

The question becomes:

How much working capital will this business actually need after closing?

The buyer may evaluate whether the proposed target reflects normal operations and whether additional cash could be required after the transaction.

Because working-capital mechanics can influence the cash ultimately delivered or retained at closing, this analysis can have direct economic consequences.

When Should a Seller Consider a Sell-Side QoE?

Not every transaction requires the same level of diligence, but sell-side QoE may be particularly useful when:

• Financial reporting has been inconsistent
• Proposed earnings adjustments are significant or complex
• The company has experienced rapid growth
• Revenue mix has changed
• The business has completed acquisitions
• Margins have been volatile
• Customer concentration is significant
• Management wants to identify financial questions before the buyer controls the diligence timeline

The earlier these issues are understood, the more time management has to prepare.

When Should a Buyer Consider a Buy-Side QoE?

Buy-side QoE can become particularly relevant when:

• Purchase price depends heavily on adjusted EBITDA
• Revenue recognition is complex
• Customer concentration is significant
• Working-capital requirements are material
• The business has experienced rapid growth or operational changes
• The acquisition involves debt or outside capital
• Management needs a clearer understanding of post-close cash requirements

The analysis can also inform areas beyond diligence, including transaction structure and post-close planning.

Can a Buyer Rely on the Seller’s QoE?

A sell-side QoE can make a transaction process more efficient.

It may provide organized schedules, identify key financial issues, and give buyers a useful starting point for their own analysis.

But it does not eliminate the need for independent buyer judgment.

The buyer has its own investment thesis, financing structure, risk tolerance, and assumptions. Its diligence team may therefore refine the scope, challenge certain adjustments, request updated periods, or investigate issues that are particularly relevant to the proposed acquisition.

Access to underlying records and supporting information remains important.

A strong sell-side QoE can improve the quality of the conversation. It does not automatically answer every question a buyer should ask.

Common Misunderstandings About Quality of Earnings

There are several misconceptions worth avoiding.

A QoE report does not guarantee a transaction will close.
Financial diligence is only one component of a broader transaction process.

A QoE report is not an audit opinion.
The objectives and procedures are different.

A QoE report does not determine company value by itself.
Its findings may influence valuation assumptions, but value depends on a broader set of financial, operational, strategic, and market considerations.

More adjustments do not automatically mean stronger earnings.
The quality and supportability of adjustments matter more than their quantity.

A clean QoE does not eliminate transaction risk.
Operational, commercial, legal, tax, integration, and other risks can remain even when the financial analysis is strong.

Final Takeaway: Start With the Decision the Report Must Support

Sell-side and buy-side Quality of Earnings reports may analyze many of the same financial records, but they are designed to answer different questions.

For the seller, the emphasis is preparation: understand the financial story, support key adjustments, prepare working-capital analysis, and identify issues before buyer diligence accelerates.

For the buyer, the emphasis is validation: test sustainable earnings, evaluate assumptions, understand working-capital requirements, and identify financial risks that could affect the economics of the transaction.

A useful QoE engagement therefore begins with the decision it needs to support.

The objective is not simply to produce another financial report. It is to help buyers and sellers understand the earnings they are relying on—and the conditions and risks that could change the deal.

Preparing to Buy or Sell a Business?

CO Capital Advisory Group provides M&A Advisory and Financial Due Diligence support to help buyers and sellers evaluate the financial questions behind a transaction.