Andy Jordan has seen a target carry 44 separate EBITDA adjustments. They rolled up into eight categories, but a count that high forces a question.
“…the whole purpose of a quality of earnings analysis is to normalize. But if you have 40 independent, unique instances, how is that business normal then?” Andy Jordan, then Principal at Riveron Consulting, M&A Science Podcast (Ep. 1)
That question sits at the center of every quality of earnings report. The seller’s income statement tells you what the accounting says. The QoE tells you what the business actually earns on a normal year, and that number is what you’re paying a multiple on.
This guide covers what a QoE includes, how it differs from an audit, what it costs, and how buyers turn the findings into price, peg and protection. It draws on three practitioners from the M&A Science archive: Jordan, a transaction advisor; Amr Abdelaziz, who led M&A finance at Equinix; and Praveen Ghanta, a founder who sat across the table from a buyer’s QoE team.
What a QoE report is, and how it differs from an audit
A quality of earnings report restates a target’s historical results to show its normalized, recurring earnings, usually expressed as adjusted EBITDA. An audit tells you whether the books follow GAAP. A QoE tells you what the business is worth paying for.
Amr Abdelaziz, then Senior Director of M&A Finance at Equinix, described the job as converting an accounting income statement into an economic one. His team strips out anything one-off, like a fire or a single project that won’t repeat, to find what the business earns on a continuing basis. That normalized number becomes the base the purchase price is built on.
Jordan framed the scope the same way: test the revenue stream and the expense stream over at least two years plus the trailing twelve months, take everything down to EBITDA, then adjust for one-time events. CPA firm BPM describes a typical QoE as working from monthly data across three years plus the trailing twelve months (BPM, March 2025).
That last row matters most in a negotiation. Abdelaziz was blunt about it.
“…there’s no standard that says this is the right earnings because we are looking at the economic earnings. It’s not like a U.S. [GAAP] earnings.” Amr Abdelaziz, then Senior Director, M&A Finance at Equinix, M&A Science Podcast (Ep. 175)
A clean audit doesn’t replace a QoE. BPM notes that even companies with clean audit opinions typically go through a QoE in a sale, because buyers need transaction-specific answers an audit isn’t built to give.
What a QoE covers
A buy-side QoE produces three numbers that land in the purchase agreement: adjusted EBITDA, a working capital target, and a schedule of debt-like items. KLR partner Justin Nelson lists developing the peg and finding “all forms of debt and potential debt-like items” as core buy-side scope (KLR, April 2026). Here is what sits underneath each.
EBITDA adjustments
Adjustments remove what won’t repeat under new ownership. Jordan’s examples range from the routine to the absurd: an owner’s family running personal shopping through admin expense, a vacation home booked as a land purchase, cruises and luxury cars on the P&L. Those get added back.
The less colorful ones matter more. Jordan removes one-time gains, like a manufacturer selling a million-dollar machine it has never sold before. He also adjusts for out-of-period revenue, bonus timing and bad debt that hit the wrong month, plus cash-to-accrual conversions for businesses that don’t keep accrual books.
Adjustments cut both ways. When a target lost a customer worth 20% of revenue during the trailing twelve months, Jordan’s team pulled that customer’s revenue and cost of goods out of the run rate. The buyer wasn’t going to get that margin, so it didn’t belong in the number.
Revenue quality
Jordan’s standard test is a proof of revenue: compare reported revenue to cash actually landing in the bank, adjusting for working capital swings and transfers. When a system can’t produce product-level margins, his team rebuilds them, because a blended margin can hide a product that costs five hours to make while the system says one.
KLR adds the commercial lens: margins, customer retention, concentration, product mix and geography all belong in a quality of revenue assessment.
Working capital
The QoE analyzes monthly net working capital to set a normalized target, or peg, for closing. If the business delivers less working capital than the peg at close, the price adjusts down. Because the adjustment is dollar for dollar, a soft peg moves value as surely as a bad add-back.
Debt-like items
Abdelaziz calls this the quality of assets. His team asks whether receivables will actually be collected, looks for off-balance-sheet commitments, and checks whether a lawsuit is sitting unrecorded. Any additional debt or liability they find is deducted from the purchase price, and he noted the deduction “can be really material.”
HR findings feed the same schedule. Accrued vacation, pensions, stock option obligations and bonuses the seller should pay all become deductions. Taxes too: Praveen Ghanta, selling his company Hidden Levers, faced a buyer claim of roughly $600,000 in uncollected sales tax. He worked it state by state and got it down to about $100,000.
Cost, timing and who performs it
A buy-side QoE on a mid-market deal typically costs $45,000 to $90,000 and takes four to six weeks, according to CPA firm BD Emerson’s July 2026 fee guide. Fees climb with enterprise value, entity count and how messy the books are.
The two firms price the same band differently, which is the point. BD Emerson says two providers can quote the same target very different fees and both be reasonable, because there’s no standard scope. Read the engagement letter for what’s excluded, not just what’s included.
BD Emerson flags the cost drivers worth knowing before you sign: cash-basis books add 20% to 50%, each extra entity or ERP adds roughly $5,000 to $15,000, and a compressed two-week turnaround carries a 15% to 40% premium. If the deal slips, rolling the analysis forward runs about $5,000 to $15,000 per month.
Timing. Midwest CPA quotes two to four weeks for smaller deals and tells buyers to budget about four. BD Emerson puts a standard buy-side QoE at four to six weeks and sell-side work at five to eight. Both say the real constraint is how fast the seller answers questions, which matches what Jordan called his biggest challenge: getting clean data and access to management.
Who performs it. Transaction advisory teams at CPA firms do most of the work. At Equinix, Abdelaziz staffed by capacity and deal size: some work stayed in-house, and for a multi-billion-dollar deal his team brought in a Big Four firm. Even then, his team led the negotiation. The advisor states the facts; the buyer decides what to do with them.
Who commissions it. The buyer commissions its own QoE. Sellers increasingly commission one too before going to market. Jordan said a sell-side QoE speeds things up because the data is already gathered, but the buyer should still run its own. Abdelaziz agreed: a sell-side report tells him the seller has done prep work, and he still builds his own number.
How to use the findings: price, peg, reps and walk-away triggers
A QoE is only worth its fee if the findings change the deal. Abdelaziz sorted every finding into one of three outcomes: lower the price, patch the risk in the purchase agreement, or walk.
Price
Abdelaziz’s LOIs stated the price was “subject to our financial due diligence” for exactly this reason. His illustration: the target says earnings are $10 million, the QoE says $6 million, and the multiple applies to the $6 million. That gap is the negotiation.
Expect the two sides’ numbers to differ. Abdelaziz said he had rarely, if ever, seen the buyer’s and seller’s QoE agree. Deals settle at a point on the spectrum, and where that point lands depends on leverage. In a buyer’s market you push toward your number; in a seller’s market, other bidders are waiting.
His team kept an issues list. Findings went into a parking lot through diligence, then got negotiated as a bundle: each side concedes some, holds others. The three recurring buckets were whose EBITDA wins, which items count as debt, and how much protection the buyer gets.
Peg and definitions
The peg and the debt definitions often move more money than the headline price. Abdelaziz once watched broad debt-like definitions in a signed agreement cut an $80 million to $100 million price by 90% once deductions were tallied. The seller had skipped a financial advisor to save cost. The buyer chose not to enforce it and renegotiated to a fair price in exchange for other concessions, but the definitions would have allowed it.
Ghanta saw the other side of the same mechanic. His LOI didn’t pin down how ARR would be measured, and that gap became a fight late in the deal. Lock the definitions of working capital, debt and the earnings base at LOI, then carry them into the purchase agreement.
Reps, escrow and indemnities
No QoE catches everything. Abdelaziz used the purchase agreement to cover what diligence couldn’t: broader reps and warranties, specific reps on items flagged in diligence, indemnities, conditions to close, and escrow. His example of escrow sizing was holding back $100 million of a $1 billion price for two years against tax claims, which sellers typically push down.
Walk-away triggers
Jordan’s worst red flags were about people, not numbers. One target paid cash to employees of other companies to steer business its way, and that killed the deal. On other deals he found an owner selling pallets off the books through a side arrangement, and a healthcare owner pocketing cash payments that never hit the books. Each time, the question became what else the owner was hiding.
His other early warning is volume. A business with dozens of “one-time” adjustments may not have a normal year to measure. And some findings only surface through persistence: Jordan asks the same question about three times during management interviews. On one deal management said there were no legal issues, then the controller remembered a significant lawsuit when Jordan walked through payments to law firms line by line.
“…when I get financial information, to me, it’s just numbers on a page. How do I know that these numbers on the page are truly valid, truly real?” Andy Jordan, then Principal at Riveron Consulting, M&A Science Podcast (Ep. 1)
Don’t let findings die in the report
A QoE finding only protects you if it reaches the people who act on it: the lawyers drafting reps, the team negotiating the peg, and the integration lead who inherits the business on Day 1. Abdelaziz described HR, tax, legal and treasury all feeding findings back to M&A finance so every deduction landed in one place.
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A sample QoE table of contents
Reports vary by provider and scope, but a full buy-side QoE usually follows this order. Use it to check an engagement letter for gaps.
- Executive summary. Reported versus adjusted EBITDA, key findings ranked by dollar impact, and open items.
- Basis of preparation. Periods covered (typically two to three years plus TTM), data sources, scope limits and what wasn’t tested.
- Adjusted EBITDA bridge. Each adjustment from reported to adjusted EBITDA, labeled management-proposed or diligence-identified, with support.
- Revenue quality. Proof of revenue against bank deposits, revenue by customer, product and geography, concentration, churn or retention, and recognition timing.
- Gross margin and cost of goods. Margin trends by product line and any costing problems.
- Operating expenses. Owner compensation, related-party costs, personal expenses and run-rate adjustments for open roles.
- Proof of cash. Reported results tied to bank activity.
- Net working capital. Monthly trend, seasonality, recommended definition and proposed peg.
- Net debt and debt-like items. Funded debt plus accrued bonuses, vacation, pensions, deferred revenue, unpaid taxes, litigation and off-balance-sheet commitments.
- Other findings. Tax exposures, accounting policy issues, controls observations and items referred to legal.
- Databook (appendix). The supporting schedules in spreadsheet form for the deal model.
FAQ
What is the difference between an audit and a quality of earnings report?
An audit gives an opinion on whether financial statements are fairly presented under GAAP, usually on an annual basis. A quality of earnings report restates historical results to show normalized, recurring earnings, typically monthly over two to three years plus the trailing twelve months. Buyers use the QoE, not the audit, to set price, the working capital peg and debt deductions.
How much does a quality of earnings report cost?
Fees track deal size and complexity. Midwest CPA quotes about $15,000 for deals under $5 million and $18,000 to $25,000 for $5 million to $15 million deals (October 2026). BD Emerson puts mid-market deals of $15 million to $75 million at $45,000 to $90,000, and deals above $150 million at $150,000 to $400,000 or more (July 2026).
How long does a QoE take?
Most buy-side QoEs take two to six weeks, depending on deal size and how fast the seller produces data and answers questions. Sell-side QoEs typically take five to eight weeks because they must hold up against every bidder’s diligence team.
Does the buyer or the seller commission the QoE?
Both can. The buyer almost always commissions its own. Sellers increasingly commission a sell-side QoE before going to market to find issues early and speed up diligence, but practitioners on the M&A Science Podcast advise buyers to run their own analysis rather than rely on the seller’s.
What is a good quality of earnings ratio?
The quality of earnings ratio divides operating cash flow by net income. A ratio of 1.0 or higher generally means reported earnings are backed by cash, while a ratio below 1.0 deserves a closer look (Eton Venture Services, updated July 2026). The ratio is a quick screen, not a substitute for a QoE report, and timing differences or seasonality can push it below 1.0 without signaling a problem.
Listen to the full episodes
- Ep. 1: The Importance of Conducting a Quality of Earnings in M&A, with Andy Jordan (Riveron Consulting).
- Ep. 175: Financial Diligence in M&A, with Amr Abdelaziz (Equinix).
- Ep. 431: The Seller’s Power Shift: How to Defend Valuation After the LOI, with Praveen Ghanta (DevHawk).
Go deeper
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