A quality of earnings report is an accountant's examination of whether the profit a business reports is genuine and likely to continue. Buyers commission them; sellers increasingly commission their own before going to market. Either way it is the single analysis most likely to change a price after an offer, which makes understanding it before one lands worthwhile.
QoE meaning: what the report actually tests
Qoe meaning, in practice: whether revenue was recognized in the right period, whether costs have been understated or shifted, whether one-off gains have been treated as recurring, how much of the profit depends on a small number of customers, and whether the add-backs a seller proposes are genuinely non-recurring. The qoe report is not an audit; it is not testing whether the accounts comply with a standard, but whether the earnings are what a buyer would actually inherit.
Add-backs are where the argument happens
Owner-run businesses legitimately carry costs a new owner would not: an above-market owner salary, a family member on payroll, personal vehicles, one-off legal fees. Adding those back raises the earnings figure the price is calculated from, which is why every one of them gets tested. Q of e meaning, for a seller, largely reduces to this: can you evidence each add-back with a document rather than an explanation. Those you can survive; those you cannot get removed, and the price moves with them.
Sell-side QoE, and whether it is worth it
Commissioning your own q of e before going to market means you find the problems first, can fix or explain them, and arrive with an analysis a buyer's accountant can test rather than construct. It costs money and it shortens diligence, and on larger deals it has become close to standard. On a small sale it may not be proportionate, and the same benefit can be had informally by having your own accountant challenge the add-backs before a buyer does. The value is in being challenged early, not in the document itself.
Questions people ask about quality of earnings report
What is a quality of earnings report?
An examination of whether reported profit is genuine and repeatable: revenue timing, understated costs, one-off items treated as recurring, customer concentration and the validity of add-backs.
Q of E meaning: is a QoE the same as an audit?
No. An audit tests compliance with an accounting standard; a QoE tests whether the earnings are what a buyer would actually inherit.
Should a seller commission their own QoE report?
On larger deals it is close to standard and shortens diligence. On a small sale, having your own accountant challenge the add-backs first captures most of the benefit.