Quality of Earnings Reports Explained

You're midway through selling your business and a buyer asks for a "Quality of Earnings report." If you've never sold a company before, this probably isn't something you expected. We see it catch sellers off guard all the time in conversations on Rejigg. Here's what a Quality of Earnings report actually is, why buyers want one, and how to make sure it helps your deal instead of killing it.

What Is a Quality of Earnings Report?

A Quality of Earnings report (often called a QofE or Q of E) is an independent financial review of your business, performed by an accounting firm that specializes in transactions. Think of it as a deeper, more skeptical version of an audit. The firm digs into your books, verifies that your revenue is real and recurring, confirms your expenses are accurately reported, and checks that the earnings you've claimed actually hold up under scrutiny.

The goal is straightforward: give the buyer confidence that what they're paying for is what they're actually getting.

A QofE isn't a standard audit. Auditors confirm your financials follow accounting rules. A QofE analyst goes further, asking whether those financials paint an accurate picture of the business's future earning power. They're looking at economic reality, not just compliance.

Why Do Buyers Request a Quality of Earnings Report?

Buyers request QofE reports because they want to trust, but verify. A seller's financials are prepared by the seller (or the seller's accountant), and buyers know those numbers are presented in the best possible light. That's not dishonest. It's just human nature.

SBA lenders have made this even more common. If a buyer is financing the deal with an SBA 7(a) loan, the lender will often require a QofE before approving the financing. For deals above $2M-$3M, it's almost standard at this point.

Even in cash deals or deals with seller financing, sophisticated buyers still want the independent verification. They've heard enough stories about adjusted EBITDA (your earnings before interest, taxes, depreciation, and amortization) that looked great on paper but fell apart under scrutiny. A QofE is their insurance policy.

What Does a QofE Analyst Actually Look At?

A QofE analyst digs into four main areas, and knowing what they'll focus on helps you prepare.

Revenue Quality

The analyst wants to understand whether your revenue is sustainable. They'll look at how much comes from contracts versus one-time projects. They'll check customer concentration, meaning what percentage of revenue comes from your top customers. If 40% of your revenue comes from one client, that's something they'll flag.

They'll also look for revenue timing issues. If a big chunk of this year's revenue got pulled forward from next year through early invoicing or prepaid contracts, they'll note that.

Earnings Sustainability

This is the core of the report. The analyst is trying to determine your "normalized" or "adjusted" earnings, meaning what the business will earn on an ongoing basis under a new owner. They strip out one-time events, like a legal settlement you received or a hurricane that shut you down for a month. They're building a picture of what steady-state profitability actually looks like.

Add-Back Validation

Most sellers present their EBITDA with "add-backs," which are personal or one-time expenses that get added back to show the business's true earning power. Common add-backs include the owner's above-market salary, personal vehicle expenses, a family member on payroll who doesn't really work in the business, or one-time legal fees.

The QofE analyst will validate every single add-back. If you say you paid yourself $300K but market rate for a replacement manager is $150K, they'll check that claim. If you're adding back $80K in "personal travel" but some of those trips were clearly business development, they'll push back.

This is where messy books cause the most trouble. If you can't clearly document what an expense was and why it's a valid add-back, the analyst will either reduce it or remove it entirely.

Working Capital Normalization

Working capital is the cash your business needs to operate day-to-day, basically your current assets minus your current liabilities. The QofE analyst calculates what a "normal" level of working capital looks like for your business so the buyer knows how much cash needs to stay in the company at closing.

This matters because it affects the final purchase price. If your working capital at closing is below the normalized target, the purchase price typically gets reduced by the shortfall. Understanding how these adjustments work is closely related to how your business gets valued in the first place.

How Much Does a Quality of Earnings Report Cost?

A QofE report typically costs between $15,000 and $50,000, depending on the size and complexity of the deal. For a business selling in the $1M-$5M range, expect $15K-$25K. For deals above $5M, it's usually $25K-$50K.

The cost scales with complexity. A simple services business with clean QuickBooks data and straightforward revenue might be on the lower end. A business with multiple entities, complex contracts, or revenue recognition questions will be on the higher end. Compare that to what brokers charge (5-10% of the sale price), and you'll see why understanding each line item in your deal costs matters.

Who Pays for the QofE?

The buyer almost always pays for the QofE since they're the one who ordered it and they're the one it's designed to protect. In some deals, the cost gets split between buyer and seller, usually when the seller has agreed to it as part of the LOI (letter of intent) negotiation.

If a buyer asks you to pay for their QofE, that's unusual. It's worth asking why. You shouldn't refuse outright, but understand that the report is primarily for their benefit and their lender's benefit.

How Long Does a QofE Take?

Plan for two to four weeks once the analyst has access to your financial data. The timeline depends almost entirely on how organized your books are and how quickly you respond to information requests.

Here's what usually happens: the analyst sends an initial request list (think bank statements, tax returns, general ledger detail, customer contracts, accounts receivable aging, accounts payable aging, and payroll records). If you have all of that organized and ready to go, the process moves fast. If every request triggers a scramble to find documents, you're looking at the longer end of that range, and the buyer starts to get nervous about what else might be disorganized.

What Happens When the QofE Finds Issues?

This is the part most sellers want to understand clearly, . Here's how it typically plays out. Here's what we've seen play out.

Minor Adjustments (Most Common)

The analyst adjusts a few add-backs downward or reclassifies some revenue. Maybe your adjusted EBITDA goes from $800K to $750K.

This is normal and expected. Buyers know the numbers will shift slightly. The deal gets repriced accordingly, usually with a quick conversation and revised terms.

Significant Adjustments

The analyst finds that earnings are materially lower than presented. Maybe several add-backs don't hold up.

Maybe a big customer churned after the financials were prepared. This leads to re-trading, where the buyer comes back with a lower offer. Sometimes substantially lower.

This is where deals get tense. The seller feels like the buyer is using the QofE as a negotiating weapon.

The buyer feels like the seller overstated the business. Neither side is necessarily wrong. The best approach is to discuss the specific findings, agree on which adjustments are fair, and reprice based on the revised numbers.

Deal-Breakers

In rare cases, the QofE reveals something that kills the deal entirely. Unreported liabilities, revenue that was fabricated or inflated, or financial records so disorganized that the analyst can't form a conclusion. If the QofE firm issues a report that essentially says "we can't verify these numbers," most buyers will walk.

How to Prepare for a Quality of Earnings Report

Clean books are the single best thing you can do to prepare for a QofE. Here's what that means in practice.

Separate personal and business expenses clearly. If your personal cell phone bill runs through the business, fine. Just make sure it's in an obvious account and you can explain it in 10 seconds.

Document your add-backs before anyone asks. Build a spreadsheet that lists each add-back, the dollar amount, the account it sits in, and a one-sentence explanation. Having this ready tells the analyst you're organized and transparent.

Reconcile your bank accounts monthly. This sounds basic, but you'd be surprised how many businesses have bank reconciliation gaps. An analyst who can't tie your bank statements to your general ledger will start questioning everything.

Get your accounts receivable and accounts payable current. Old invoices that are still sitting as "receivable" when they'll never get collected inflate your working capital. Clean those up before the QofE starts.

Have your tax returns match your financials. If your P&L says one thing and your tax return says another, the analyst will want to know why. There are legitimate reasons for differences, but you need to be able to explain them.

Rejigg's QuickBooks integration automatically imports your financial data and organizes it in your listing's data room. When a QofE analyst sends their information request list, you can share access to a structured, organized set of documents instead of scrambling to find files in email attachments and desk drawers.

Should You Get Your Own QofE First?

In some cases, getting a pre-emptive QofE before going to market is a smart move. If your business is doing north of $3M in revenue and you know the financials have some complexity, spending $15K-$20K on your own QofE can save you from surprises later.

A seller-side QofE lets you find and fix issues before a buyer's analyst finds them. Maybe that add-back for your spouse's salary needs better documentation. Maybe the way you've been recording a long-term contract overstates revenue in some months. Fixing these before due diligence starts means the buyer's QofE comes back clean, which builds massive confidence.

The downside is cost. If you're selling a $1.5M business, spending $15K on a pre-emptive QofE is a big upfront expense for a deal that might not close. For smaller deals, your money is better spent on getting a good bookkeeper to clean things up.

A Clean QofE Builds Buyer Confidence

When a QofE comes back clean, it changes the entire dynamic of the deal. The buyer stops second-guessing the numbers. Their lender approves faster. Negotiations shift from "are these numbers real?" to "let's get the deal closed."

We've seen deals on Rejigg where a clean QofE actually increased the final sale price because a competing buyer was willing to pay a premium for a business with independently verified financials. When a buyer knows the numbers are solid, they stop looking for reasons to discount the price and start competing on terms. If you want to understand what buyers actually focus on during due diligence, the QofE covers most of it.

A clean QofE is one of the strongest tools in your corner as a seller. If your business is as strong as you say it is, the report will prove that to buyers and lenders. And if there are issues, better to know about them now than to have a deal blow up three months in.

Get Your Financials Ready

The best time to start preparing for a QofE is before you even list your business. Clean books, documented add-backs, and organized records turn a potentially stressful process into a routine checkpoint.

Rejigg's data room and QuickBooks integration help you organize your financial documents from day one. When a buyer's QofE analyst comes knocking, you'll have everything they need ready to share. And because Rejigg is free for sellers, there's no cost to getting started.

If you're curious what your business might be worth before diving into any of this, try the Rejigg valuation calculator. It uses real transaction multiples and factors in owner add-backs, giving you a starting point for understanding where a QofE analyst will focus their attention.

Frequently Asked Questions

How long does a Quality of Earnings report take?

A Quality of Earnings report typically takes two to four weeks once the analyst has your financial data. The biggest variable is how quickly you can provide documents they request. Sellers with organized books and a prepared data room consistently finish on the shorter end of that timeline.

Can a QofE report kill a deal?

Yes, but it's uncommon. Most QofE reports result in minor adjustments that lead to a small price change. Deals die when the report reveals major discrepancies like fabricated revenue, undisclosed liabilities, or books too disorganized to verify. Transparent sellers with clean financials rarely face deal-ending QofE findings.

Should a seller pay for a Quality of Earnings report?

The buyer typically pays since the QofE protects them and satisfies their lender's requirements. Some sellers choose to commission their own pre-emptive QofE before going to market, which costs $15K-$20K but can prevent surprises during due diligence and build buyer confidence.

Do SBA lenders always require a QofE?

Not always, but it's becoming standard for SBA-financed acquisitions above $2M. Many SBA preferred lenders now require an independent QofE before approving the loan. Even when not required, most sophisticated buyers choose to get one. Sellers should assume a QofE will happen and prepare accordingly.

What's the difference between a QofE and an audit?

An audit confirms your financials follow accounting standards. A QofE goes deeper, analyzing whether those financials accurately reflect the business's future earning power. The analyst validates add-backs, normalizes working capital, checks revenue sustainability, and flags anything that might affect the business's value under new ownership.