Glossary
Quality of earnings
An analysis, usually prepared by an accounting firm during due diligence, of whether a business's reported earnings are accurate, sustainable and free from one-off or aggressive items. Often called a QoE report.
In plain English
A quality of earnings review goes behind the headline EBITDA. It tests revenue recognition, the adjustments behind normalised EBITDA, the consistency of margins, working capital trends and anything that might flatter the numbers. Buyers commission it to confirm what they are paying for; some sellers commission their own in advance.
The output feeds directly into price, structure and the protections a buyer seeks.
Why it matters
Issues found in a quality of earnings review can lead to further investigation, adjustments to earnings or the equity bridge, changes of structure, retentions or indemnities, or occasionally withdrawal, depending on how material they are and whether they can be remedied. Issues the seller has already identified and explained are far easier to handle.
What to watch for
- Prepare a defensible normalised EBITDA bridge before a process.
- Keep revenue recognition consistent and documented.
- Consider vendor due diligence for larger or competitive processes.
Transaction language and legal treatment depend on the agreement and the jurisdiction. Written by Motion Advisory Partners as general guidance, not legal advice.