What is a Quality of Earnings report?

A Quality of Earnings (QoE) report is the diligence workproduct that translates a company's reported financials into adjusted, defensible EBITDA and working-capital numbers a buyer, sponsor, or lender will underwrite against. It includes an EBITDA bridge, revenue quality analysis, working capital analysis, and a proof-of-cash.

What is the difference between a sell-side and buy-side QoE?

A sell-side QoE is commissioned by the seller before going to market to anticipate what a buyer will find and clean it up first. A buy-side QoE is commissioned by the buyer during diligence to validate the target's numbers. A sell-side QoE almost always improves outcomes because it removes surprises.

How far in advance should a seller commission a sell-side QoE?

6 to 12 months before going to market. Enough time to clean up add-back documentation, convert handshake customers to signed contracts, fix working capital reporting, and shore up any accounting hygiene issues the report will surface.

What is a working capital peg?

The working capital peg (or target) is the amount of working capital a buyer requires the business to close with. If the business closes above the peg, the seller gets the difference; below, it's deducted from proceeds. Buyers typically define the peg based on a trailing 12-month average, which can differ meaningfully from what the seller expected.

What Is a QoE (Quality of Earnings)? What Buyers and Lenders Actually Look At

A QoE is the diligence report that determines the real EBITDA a deal gets priced on. Here's what's inside, who reads it, and how sellers get surprised.

George Fassett, Jr. · July 13, 2026

A Quality of Earnings (QoE) report is the diligence workproduct — typically prepared by an independent accounting firm — that translates a company's reported financials into the numbers a buyer, sponsor, or lender will actually underwrite against. It's the difference between the seller's EBITDA and the deal's EBITDA.

What's Inside a QoE

Adjusted EBITDA bridge. Line-by-line adjustments from reported EBITDA to adjusted EBITDA — add-backs (owner comp, one-time costs) and subtractions (non-recurring revenue, capitalized labor).
Revenue quality analysis. Recurring vs one-time, customer concentration, retention, cohort behavior, pricing changes.
Cost structure walk. Variable vs fixed, cost-to-serve, gross-margin sustainability.
Working capital analysis. Peak-to-trough working capital, seasonality, days receivable, days payable, and the true working capital "target" the deal should close at.
Net debt walk. Cash, debt, cash-like items, debt-like items — the number that adjusts the purchase price at close.
Proof-of-cash. Reconciliation of bank cash to reported cash, month by month.

Who Reads It

Buyers. Anchor their bid and their financing on the adjusted EBITDA and working capital target.
Sponsors' credit committees. Use it to size debt and validate the model.
Lenders. Underwrite against normalized EBITDA and the net-debt walk.
Sellers' advisors. Anticipate the buy-side QoE by running a sell-side QoE first — usually the highest-ROI diligence dollar a seller spends.

Where Sellers Get Surprised

Add-backs the buyer refuses. Personal expenses without a paper trail, aggressive owner comp normalization, "one-time" costs that keep recurring.
Non-recurring revenue reclassified out of run-rate. Big project year gets stripped from the base.
Working capital target higher than expected. Buyer-defined peg reduces cash at close.
Undisclosed customer concentration. Prices in risk that seller didn't model.
Proof-of-cash gaps. Bank recs that don't tie to reported cash trigger extended diligence and price chips.

How Real Operators Prepare

Sell-side QoE. Commission one 6-12 months before market. See the deal the way a buyer will.
Add-back paper trail. Every add-back backed with an invoice, a policy, a rationale.
Working capital analysis first. Understand what you actually need to run the business through peak season.
MSA and contract audit. Convert handshake customers to signed contracts before due diligence.

Mebuis engagements support sell-side prep as part of Fractional CFO mandates — the reporting hygiene, add-back paper trail, and revenue-quality work that makes a QoE clean 6-12 months before it matters. Book an operator alignment call.

Frequently Asked Questions

What is a Quality of Earnings report?: A Quality of Earnings (QoE) report is the diligence workproduct that translates a company's reported financials into adjusted, defensible EBITDA and working-capital numbers a buyer, sponsor, or lender will underwrite against. It includes an EBITDA bridge, revenue quality analysis, working capital analysis, and a proof-of-cash.
What is the difference between a sell-side and buy-side QoE?: A sell-side QoE is commissioned by the seller before going to market to anticipate what a buyer will find and clean it up first. A buy-side QoE is commissioned by the buyer during diligence to validate the target's numbers. A sell-side QoE almost always improves outcomes because it removes surprises.
How far in advance should a seller commission a sell-side QoE?: 6 to 12 months before going to market. Enough time to clean up add-back documentation, convert handshake customers to signed contracts, fix working capital reporting, and shore up any accounting hygiene issues the report will surface.
What is a working capital peg?: The working capital peg (or target) is the amount of working capital a buyer requires the business to close with. If the business closes above the peg, the seller gets the difference; below, it's deducted from proceeds. Buyers typically define the peg based on a trailing 12-month average, which can differ meaningfully from what the seller expected.

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