Selling a business is a major milestone for any owner. The process is complex, and the stakes are high. The M&A Advisors at Marsh Creek emphasize that preparation—especially around financial transparency—is the key to a successful exit. One of the most effective tools in this process is the Quality of Earnings (QoE) report.
The Role of Quality of Earnings in Transactions
A Quality of Earnings report is a comprehensive financial analysis that goes beyond standard financial statements. It normalizes earnings, separates recurring from one-time items, and provides a clear view of sustainable EBITDA and cash flow. This clarity is essential for both sides of a transaction. Buyers depend on QoE reports to validate the numbers presented, ensuring that the business’s earnings are real and defensible. Sellers who invest in a QoE report before going to market can avoid unpleasant surprises and protect their valuation throughout the process.
Who Commissions QoE Reports—and Why
Historically, buyers such as private equity firms, strategic acquirers, and family offices have commissioned QoE reports as part of their due diligence. Their goal is to confirm the accuracy of the seller’s financials. However, more sellers are now investing in sell-side QoE reports before listing their businesses. This proactive approach is increasingly seen as best practice, especially for companies with EBITDA of $2 million or more. By providing a QoE upfront, sellers demonstrate seriousness and can command the market, reducing the risk of price reductions late in the process. The buyer will still perform their own diligence, which will likely include a buy side QoE, but going to market with one in hand increases confidence in the process and shows the market that a seller is serious.
What the Process Involves
A thorough QoE review typically covers:
- Two to three years of financials, plus the trailing twelve months (TTM)
- Normalization of EBITDA and identification of recurring vs. non-recurring items
- Analysis of revenue recognition, vendor and customer concentrations, and contract viability
- Identification of red flags, such as improper revenue timing in industries like contracting
The process usually takes about four weeks if all parties are responsive. Costs generally range from $35,000 to $60,000, depending on business size and complexity. While this is a significant investment, it is small compared to the value it can create or protect in a transaction.
Considerations for Smaller Businesses
For businesses with less than $2 million in EBITDA, a full QoE report may not be necessary. However, preparation remains critical. Owners should work with their CPA or a trusted M&A Advisory Firm to ensure financials are accurate, recurring expenses are identified, and personal or one-time items are separated. Even basic steps like a proof-of-cash or a review of revenue recognition policies can make a significant difference when buyers begin their diligence.
Common Pitfalls and the Importance of Preparation
One of the most common reasons deals fall apart is surprises in the numbers. Even the best businesses can encounter issues if their financials are not “deal ready.” Buyers will always conduct their own due diligence, and discrepancies between their findings and the seller’s numbers can lead to “retrade”—a late-stage reduction in price or even a failed deal. Marsh Creek Advisors stresses that only about 25–30% of businesses that go to market actually close, and preparation is the single most important factor in improving those odds.
The Marsh Creek Advisors Advantage
Marsh Creek Advisors is a Business Brokerage offering M&A Advisory and business valuation services designed to help business owners prepare for a successful exit. Through their proprietary PowerExit™ Strategy and their Trust before your transaction™ philosophy, they ensure clients throughout the U.S. have the information, documentation, and support needed to move through the sale process with confidence and control.
