Quality of Earnings
Definition
A quality of earnings (QoE) review is an analysis of how sustainable and reliable a company's reported profits are, carried out during due diligence. Rather than re-auditing the accounts, it tests whether earnings reflect genuine, repeatable trading: it examines revenue recognition, customer concentration, the split between recurring and one-off income, the working-capital cycle, and every adjustment made to arrive at normalised EBITDA. A buyer commissions a QoE to confirm the earnings they are paying a multiple for are real; a seller increasingly commissions their own (a vendor QoE) before going to market, to defend the numbers and avoid surprises that reset the price mid-process. In the UK, QoE work is typically performed by a corporate finance or transaction services team. High earnings quality — diversified, contracted, cash-backed revenue — supports a higher multiple; low quality invites price chips, earn-outs and indemnities.
Complementary Terms
Concepts that frequently appear alongside Quality of Earnings in practice.
Normalised EBITDA (also called adjusted EBITDA) is a company's earnings before interest, tax, depreciation and amortisation, restated to show the sustainable earning power a buyer would inherit. The reported figure is adjusted to remove one-off items, owner-specific costs and non-market arrangements — an above-market owner's salary, personal expenses run through the business, exceptional legal costs, or the effect of a related-party contract — and to add back or strip out anything that will not recur under new ownership.
The comprehensive investigation and analysis of a business prior to an investment, acquisition, or partnership. Due diligence covers financials, legal, commercial, technical, and operational areas, and increasingly includes assessment of intangible assets and productivity metrics.
A comprehensive due diligence exercise commissioned and paid for by the seller of a business prior to a sale process, with the resulting reports made available to prospective buyers. VDD typically covers financial, tax, commercial, and legal matters and is prepared by independent professional advisors.
Reverse due diligence is diligence a seller, or the management team of a target, carries out on the buyer. In any deal where the seller retains an ongoing interest — an earn-out, a rollover of equity into the enlarged group, or a management team joining a private-equity platform — the buyer's quality matters as much to the seller as the reverse.
Further Reading
Acquisition Due Diligence: The Operator's Checklist
Where quality of earnings sits in the diligence process.
Read more →Related FAQ
How much does it cost to sell a business?
Expect adviser or broker fees, legal fees and, often, tax on the gain. Fees vary widely by deal size and complexity; larger deals typically pay a corporate finance adviser a success fee plus legal costs.
Read full answer →What is my business worth to a buyer?
A buyer applies a multiple to your normalised earnings and sets that multiple on the quality of your intangible assets — brand, customers, technology, processes and people — not on last year's profit alone.
Read full answer →How do I reduce founder dependency before selling?
Document the decisions and relationships only you hold, distribute customer contacts across your team, build a management layer, and withdraw from day-to-day operations in stages so the business demonstrably runs without you.
Read full answer →Put this knowledge to work
Use Opagio's free tools to measure and grow the intangible assets that drive your business value.