If you’re buying a small business, someone has probably told you to get a Quality of Earnings (QoE) report. That’s good advice. But not all QoEs are created equal.
Some reports give you clarity. Others give you a PDF full of charts and accounting jargon that don’t help you make better decisions. The difference matters, especially if this is your first acquisition or if you’re working with lenders or investors who expect a strong diligence package.
In this article, we’ll break down what a good QoE report actually looks like, how it supports your deal process, and what signs to look for when evaluating one.
Let’s start with the basics.
A Good QoE Starts with Relevance
The best reports don’t feel generic. They’re rooted in the details of the business you’re buying, and they take into account the way the company actually runs. They also consider what you care about most.
If you’re looking at a seasonal service business, the QoE should reflect seasonality in its analysis. If the seller runs everything through their personal account, the report should explain how that affects the numbers. If you’re buying with financing, the provider should understand what your lender is going to want to see.
This kind of tailoring shows that the report wasn’t just written to check a box. It was written to support a real acquisition with real consequences.
Clear Normalization of EBITDA
At the core of any good QoE is the adjusted EBITDA number. But more importantly, it’s how the report gets there.
You want transparency on what was added back, what was removed, and why those decisions were made. The best providers walk through each adjustment in plain language and offer context. For example, was that consulting expense truly one-time? Or is it likely to come back next year under a different name?
You don’t have to be an accountant to understand a well-explained QoE. You just need the provider to do their job: explain what’s behind the numbers, not just where they land.
Revenue Should Be Scrutinized, Not Just Totaled
Most buyers focus on earnings, but revenue quality matters just as much.
Where does the money come from? How reliable is it? You want the QoE to help you understand the nature of revenue and whether it’s likely to continue after the deal closes.
This part of the report should highlight:
- Whether revenue is recurring, repeat, or one-time
- Customer concentration issues or dependence on a few big accounts
- Unusual spikes tied to seasonality, discounts, or one-off events
- The degree of owner involvement in generating revenue
- Platform risk (especially in ecommerce or digital businesses)
The more clarity you have around what drives revenue, the better you can assess risk and sustainability. A good QoE doesn’t just show top-line trends, it explains how they happen.
Risks and Gaps Should Be Spelled Out
No business is perfect. And a QoE report isn’t helpful if it glosses over the rough spots.
If margins declined over time, the report should say so. If there’s limited documentation for key contracts, that should be noted. If financials are only available in QuickBooks and haven’t been reviewed in years, the report should let you know what that means.
In other words, a strong QoE doesn’t just verify numbers. It identifies weak points and areas where further diligence is needed. That’s what makes it useful. It doesn’t pretend the business is cleaner than it is. It gives you the information you need to make a smart call.
Working Capital Gets Proper Attention
One area that catches many first-time buyers off guard is working capital.
A good QoE provider will look closely at the company’s current assets and liabilities, identify patterns, and explain what a “normal” working capital balance might be. That analysis can directly impact your purchase agreement, since many deals include a working capital peg or true-up.
If the report skips this step or treats it like an afterthought, that’s a problem. Cash timing, accounts receivable delays, and seasonal swings can all affect how much you really need to operate the business post-close. A good QoE helps you see this in advance, not after the wire hits.
Honest About What’s Missing or Unverifiable
In small business acquisitions, incomplete records are more common than most buyers expect. That’s not necessarily a dealbreaker, but pretending everything is fully documented is.
A good QoE provider doesn’t ignore gaps. They explain them.
Look for the report to clearly note:
- Missing or outdated financial statements
- Verbal contracts or handshake agreements
- Limited access to payroll or tax data
- Seller-provided numbers that couldn’t be independently verified
- Assumptions made due to lack of documentation
You don’t need everything to be perfect. But you do need to know where the risks are so you can either address them or factor them into how you structure the deal.
The Report Should Be Accessible
You shouldn’t need a background in finance to understand the core findings. A well-written QoE uses plain language and explains accounting terms as needed. The layout should be clean and easy to follow. The commentary should focus not only on what was found, but also on why it matters to you as the buyer.
More importantly, you should be able to speak to the provider and get clear answers to your questions. If you’re left unsure about what a number means or how something was treated, the process isn’t working.
A QoE isn’t just about delivering a document. It’s about delivering clarity.
Why All of This Matters
In many small business transactions, the QoE ends up being the most detailed look at the company’s financial health. It’s what lenders, investors, and board members will reference. It’s the report that can give you leverage in negotiations or alert you to risks that justify walking away.
And yet, some buyers treat it like a checkbox. They hire a provider, pay the fee, get a 40-page report, and move on. That’s not diligence. That’s decoration.
A good QoE helps you make real decisions. It helps you validate the price, negotiate terms, secure funding, and go into closing with your eyes open.
Final Thoughts
If you’re buying an SMB, your diligence process needs to be efficient but also thorough. The Quality of Earnings report is one of the few tools that brings both together. When done well, it brings together the numbers, the context, and the insight.
Don’t settle for a provider who just plugs numbers into a template. Look for one who asks smart questions, digs into the details, and explains what they find in a way that supports your goals.
That’s the difference between a report that checks a box and one that helps you buy a business with confidence.
Contact us today or book a free consultation and learn how we can be a trusted partner on your next deal!
