Quality of Earnings Explained for Owners: What the Report Checks, What It Costs and How to Prepare

By Andreas Pettersson, Founder, Leaders ADAPT

The letter of intent says $9 million. Six weeks later a 70 page document arrives from the buyer's accountants and the price is $7.4 million. Nothing in the business changed. What changed is that someone rebuilt your profit from the bank statements, and the number they found was smaller than the number you had been telling yourself.

That document is a quality of earnings report, and it is where most owner led deals lose money. Not at the negotiating table. In the spreadsheet behind it.

I have been through diligence from the inside, as the CEO selling Arcules to Canon and later as the operator Canon kept. The best protection against a buyer's quality of earnings team is to have already done their work, a year early, on your own terms. This page explains what the report checks, who orders it, what it costs with sources, sell side versus buy side, and how to prepare twelve months out.

What is a quality of earnings report?

A quality of earnings report, QoE for short, is a transaction document. It is written by an accounting or transaction advisory firm for one purpose: to tell a buyer how much of the seller's profit they should believe.

It is not an audit. An audit tells you whether the statements follow the accounting rules. A QoE tells you whether the earnings would survive a change of owner. A company can have clean audited statements and a bad QoE, because the audit never asked whether the top customer's contract expires in March or whether the owner's salary is $400,000 below what a replacement would cost.

The output is a single number, adjusted EBITDA, with a bridge that shows every step from your reported profit to theirs. That number gets multiplied. As the how much is my business worth page lays out, the IBBA Market Pulse recorded a median multiple of 5.8 times EBITDA for $5 million to $50 million deals in Q2 2026. At that multiple, a $200,000 adjustment is a $1.16 million change in price. That is why the report matters more than the pitch deck.

What the report checks, line by line

Four areas carry most of the weight. Here is what the QoE team does in each one and what owners get wrong.

Two more areas appear in nearly every report. Proof of cash, where the team ties revenue to bank deposits month by month, and payroll, where they check that the people who produce the earnings are paid at market and likely to stay. The second one is where key person risk enters the numbers: if the owner and one operations lead carry the company, the QoE will say so, and the buyer will price it.

The pattern across all four is the same. The owner has a story about each number. The QoE team has a bank statement. The bank statement wins.

Who orders it: sell side vs buy side

Buy side QoE. The buyer orders it after the letter of intent is signed, during exclusivity. The buyer pays. The report goes to the buyer, and you see the conclusions when they come back to renegotiate. This is the default, and for most owners it is the first time anyone has looked at the business this way.

Sell side QoE. You order it before going to market. You pay. The report goes to you first, then into the data room for buyers. Its job is to find every problem a buy side team would find, while there is still time to fix the fixable ones and to frame the rest.

Here is the asymmetry that owners miss. During exclusivity you have one buyer and no walk away option that does not cost you months. The buyer knows it. A price reduction at that stage is not a negotiation, it is a decision about whether to start over. A sell side report moves the argument to a moment when you still have options, and the IBBA's Q1 2026 survey of 300 advisors found 83 percent of deals above $5 million attracted at least three offers. Options are what protect a price.

Whether you order a full sell side report or a lighter financial clean up depends on size and on how clean the books are. Above about $2 million in EBITDA, I would order it. Below that, a fractional CFO engagement often gets most of the benefit at a fraction of the cost, and the fractional CFO page describes what that looks like.

What a quality of earnings report costs

These are published ranges from two providers, with dates. Leaders ADAPT does not sell this service, and your quote will depend on the state of your records.

BD Emerson states that sell side work runs 10 to 30 percent above the equivalent buy side scope and lists the cost drivers: cash basis or hybrid books add 20 to 50 percent to the fee, each additional entity or accounting system adds roughly $5,000 to $15,000, and a two week turnaround carries a 15 to 40 percent premium. Eton Venture Services puts the typical timeline at four to eight weeks.

Read the cost drivers again, because they are the preparation list in disguise. Accrual books, one entity, one system, no rush. Each is a decision you can make this year, and each lowers both the fee and the findings.

Is it worth it? A $1.5 million EBITDA business at 5x is $7.5 million. If a sell side report defends $150,000 of add backs that a buy side team would otherwise reject, it has paid for itself ten times over. If your books are already clean, it confirms what you knew, which is worth something at the table, but less.

How to prepare 12 months out

The report you want in month twelve is built in months one through nine. Here is the sequence I run with owners, with Steve Shaw on the numbers.

Months one to three: get to accrual and close the months. If you are on cash basis, convert. Close every month within 15 days and keep it closed. Reconcile every bank and credit card account. A QoE team that cannot tie revenue to deposits does not give you the benefit of the doubt.

Months two to four: document every add back. Make a list. For each item, attach the invoice, the explanation and the business logic. Decide your own replacement salary at market, not at what you wish it was. Then stop running personal expenses through the company, because every month you continue is another month of adjustments to defend.

Months three to six: fix revenue recognition and contracts. Move annual customers onto signed agreements with clear terms. Recognize project revenue on delivery. Get the top ten customers on paper with renewal dates you can show. If a customer is above 20 percent of revenue, start the conversation about a longer term now.

Months four to eight: understand your working capital. Build a 13 week cash flow, which the 13 week cash flow page explains, and use it to see your normal receivables, payables and inventory levels. Clean the receivables aging. Write down dead inventory this year, not in diligence.

Months six to nine: build the data room before anyone asks. Three years of monthly financials, tax returns, customer level revenue, payroll register, every contract over a threshold, and the add back file. If you cannot produce it in a week, you are not ready.

Months nine to twelve: order the report, or the lighter version. With the groundwork done, the report confirms rather than discovers. That is the goal.

The prepare a business for sale page places this finance track inside the full 24 month sequence alongside leadership and operations, which is where most of the owner dependency lives.

Where AI fits in QoE preparation

Three jobs, all in the preparation months, none in the report itself.

First, proof of cash. An AI tool with access to your general ledger exports and bank statements can tie revenue to deposits month by month and flag the gaps in an afternoon. That used to take a controller two weeks. I run a Fractional AI Executive offer with technical partners, and this reconciliation pass is one of the first things we do for an owner who is twelve months out.

Second, the add back file. Classifying three years of expense transactions, pulling the owner's personal items, and attaching the evidence is pattern work, and models are good at it. You still decide which add backs to claim. The model finds the candidates and the receipts.

Third, customer concentration and contract review. Reading two hundred customer agreements for term, termination and renewal clauses and building the concentration table by year is exactly the kind of work that used to be skipped because nobody had the hours. The connection to the AI for EOS companies work I write about is direct: a company that runs on documented systems produces clean data, and clean data produces a short QoE.

Where AI does not belong: deciding your replacement salary, choosing which findings to disclose and how, and the judgment call on whether a customer relationship will survive your departure. The what not to delegate to AI page covers that boundary. The report is a credibility document, and credibility is a human decision.

What a QoE report does not fix

A quality of earnings report is a mirror. It does not change what it reflects.

It does not fix owner dependency. If the owner is the sales engine, the report will say revenue is at risk on a change of control, and no amount of accounting makes that sentence go away. Only a management team that can run the company does, and building one is the work of leadership team development, which takes longer than a QoE and should start first.

It does not fix a thin management layer. The report will note that finance is a bookkeeper plus the owner's memory and that operations has no second in command. The buyer reads that as cost: a CFO to hire, a general manager to hire, both coming off the price.

It does not fix customer concentration in the time you have. If your top customer is 35 percent of revenue, the report will say so and the buyer will structure around it with an earnout or escrow. Diversifying takes years, which is why the report belongs in year one of a two year plan and not in month eleven of a sale.

And it does not fix an owner who argues with the findings. I have watched owners spend exclusivity defending add backs instead of fixing the process that created them. The report is not an insult. It is the first honest look at the company from outside, and it is cheaper early.

The Exit Planning Institute's 2025 research on owner readiness found that only 27 percent of baby boomer owners had a formal valuation and 5 percent had a dedicated exit planning team, while more than half planned to exit within five years. Most owners meet their first quality of earnings team at the worst possible moment, after the LOI, with one buyer and no time.

Who is on the bench for this

I take the first read myself, and then the numbers work goes to the finance leader on the Leaders ADAPT bench.

Steve Shaw is the fractional CFO who runs the preparation. Steve has twenty years in finance leadership and works with owners on clean books, cash discipline and financial positioning before a sale. For a QoE, he is the one who gets you to accrual, builds and documents the add back file, sets the replacement salary at a number a buyer will accept, and sits beside you in the numbers conversation with buyers and lenders. He has seen enough buy side reports to know what the next one will say about yours.

Thor Legvold, the leadership psychologist on the bench, handles the part of the report that is about people. When the QoE flags management depth, Thor's assessments tell us whether the operations lead can grow into the seat or whether we need to hire.

Sergey Dmitriev, the fractional CTO and AI systems partner, builds the data and reconciliation work in the preparation months, so the ledger, the bank statements and the contracts are legible to the QoE team on day one.

Every engagement runs through Leaders ADAPT. I take the first call, match the partner and stay in the room.

Quality of earnings FAQ

What is a quality of earnings report?

A quality of earnings report is an independent review of a company's earnings that tests whether reported EBITDA is real, recurring and likely to continue under a new owner. It rebuilds revenue and expenses from bank statements, contracts and ledgers, examines each add back, measures normal working capital and flags customer concentration. It is not an audit. It answers one question, how much of this profit would a buyer believe.

Who pays for a quality of earnings report?

Whoever orders it. A buy side QoE is ordered and paid for by the buyer after a letter of intent is signed, and the findings are used to confirm or renegotiate the price. A sell side QoE is ordered and paid for by the owner before going to market, so the owner finds the problems first. Many owners now do both, with the sell side report setting the terms of the argument.

How much does a quality of earnings report cost?

Published 2026 ranges from providers put a buy side report at roughly $20,000 to $35,000 for companies under $5 million in enterprise value, $25,000 to $50,000 from $5 million to $15 million, and $45,000 to $90,000 from $15 million to $75 million, with sell side work running 10 to 30 percent higher. Cash basis books, multiple entities and compressed timelines add to the fee.

What is the difference between a quality of earnings report and an audit?

An audit gives an opinion on whether financial statements comply with accounting standards. A quality of earnings report asks whether the earnings are sustainable and what a buyer should pay for them. It digs into add backs, revenue timing, customer concentration and working capital in a way an audit does not, and it is written for a transaction, not for compliance. Audited statements make a QoE cheaper, not unnecessary.

How long does a quality of earnings analysis take?

Providers publish four to six weeks for a buy side report and five to eight weeks for a sell side report, assuming the company can produce clean monthly financials, bank statements, customer level revenue and payroll detail on request. Companies on cash basis books or with several entities take longer. The preparation that shortens it has to start about a year before the report is ordered.

What are add backs in a quality of earnings review?

Add backs are expenses the owner argues a buyer will not incur, such as above market owner salary, family members on payroll, personal vehicles and travel, one time legal costs or a facility move. The QoE team accepts the ones with documents and a clear business logic and rejects the rest. On a 5x deal every $100,000 of rejected add backs removes $500,000 from the price.

Should I get a sell side quality of earnings before selling my business?

For a company above about $2 million in EBITDA, usually yes. The buyer will commission one anyway, and finding the problems a year early lets you fix them instead of conceding on price at the end. Below that size, a lighter financial clean up by a fractional CFO often achieves most of the benefit at a lower cost. The decision depends on how clean your books already are.

What does a quality of earnings report check for customer concentration?

It measures revenue by customer for the trailing three years, flags any customer above roughly 10 percent of revenue, reviews their contracts for term and termination rights, and tests whether margins differ by customer. A top customer at 25 percent or more is usually treated as a pricing risk, and the buyer may ask for an earnout or escrow tied to keeping that customer after closing.

Get the report before the buyer does

The quality of earnings report is coming either way. The only choice you have is who orders it first and how much time you leave yourself to act on what it finds.

An owner who sees the findings a year early can fix the books, document the add backs, diversify what can be diversified and build the team that makes revenue survivable. An owner who sees them during exclusivity can only argue, and arguing with a bank statement is not a strong position.

Before you book an accounting firm, find out whether the company is ready for the sale you are picturing. The free leadership and AI readiness assessments take about fifteen minutes and show how much of the business still runs through you. Then read the exit readiness page, which describes the fixed fee read on leadership, operations and technology for an owner 12 to 24 months from a sale. The QoE is one chapter of that read. The team and the systems are the rest.