A Quality of Earnings (QoE) report analyzes the sustainability, accuracy, and underlying drivers of a company’s earnings and cash flow. It provides a deeper look beyond financial statements to determine how repeatable and reliable those earnings are. QoE reports are commonly used during mergers, acquisitions, and financing decisions to provide credible insight that supports informed decision-making.

Peak Business Valuation frequently provides quality of earnings reports for sellers and investors throughout the United States. If you have questions or are interested in receiving a QoE report, contact Peak! Schedule a free consultation today.

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What is Included in a Quality of Earnings Report?

When preparing a quality of earnings report, analysts review the company’s financial data, including income statements, balance sheets, and cash flow statements. With this information, experts can assess specific elements of the business to gain a clearer picture of its financial performance. Some key elements outlined in a QoE report include:

• Normalized EBITDA: Adjusted earnings before interest, taxes, depreciation, and amortization that removes non-recurring, non-operational, or owner-specific items to reflect sustainable operating performance. This normalization helps buyers see the company’s sustainable profitability without distortions from one-time events.
• Revenue & Gross Margin: An analysis of revenue and cost of goods sold to evaluate gross profit and margin trends, helping assess pricing, cost structure, and profitability at the core operations level.
• Working Capital Analysis: Peak Business Valuation evaluates trends in accounts receivable, inventory, and accounts payable to determine the level of working capital required to sustain operations post-transaction.
• Operating Expenses: Reviewing regular business costs like rent, utilities, and salaries helps evaluate ongoing spending. This assessment helps identify whether expenses are in line with industry norms or if there are areas of inefficiency.
• Employee Analysis: Experts analyze workforce-related costs and any unusual compensation or staffing changes. Investors can use this information to ensure labor expenses are sustainable.
• Earnings Volatility & Seasonality: Analysis of trends and fluctuations in revenue and earnings to identify seasonality, cyclicality, and inconsistencies in performance.

Unlike a financial statement audit, which focuses on whether financial statements are presented in accordance with accounting standards (e.g., GAAP), a QoE analysis focuses on the sustainability and quality of earnings and cash flow. As such, QoE reports are especially valuable for buyers and investors assessing a business’s true profitability before a transaction.

Common Adjustments in a QoE Analysis

During a QoE analysis, analysts make various adjustments to reflect a company’s true, sustainable earnings. Some common adjustments include:

• Owner Compensation Adjustments: Normalizing salaries, bonuses, or personal expenses that may not reflect market rates.
• Non-Recurring Expenses: Removing one-time costs such as legal fees, restructuring costs, or unusual repairs.
• Non-Operating Income: Excluding income irrelevant to core operations.
• Related-Party Transactions: Adjusting transactions that may not reflect market terms.
• Discretionary Expenses: Identifying optional or non-essential spending that could be reduced under new ownership.

By adjusting factors that are inconsistent with typical operations, quality of earnings experts deliver their third-party analysis that credibly represents the company. Schedule a free consultation with Peak to learn more about common adjustments of a QoE report.

When Do You Need a Quality of Earnings Report?

A quality of earnings report is commonly used during mergers, acquisitions, and investments. It offers buyers and investors detailed insight into a company’s financial performance, helping guide decisions before and after a transaction. In addition, companies seeking financing or preparing for a sale often use QoE reports to build trust with lenders and buyers by demonstrating transparent and sustainable earnings. 

As a professional quality of earnings expert, Peak Business Valuation has the training and experience to deliver a thorough, credible analysis. To learn more about obtaining a QoE report, schedule a free consultation with Peak!

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Benefits of a Quality of Earnings Report

The insight provided in a QoE report can support many situations. Common benefits of a quality of earnings report include:

• Understanding Profitability: A quality of earnings report separates recurring earnings from one-time or non-operational items to better understand sustainable earnings and their relationship to cash flow.
• Identifying Financial Risks: In a QoE report, analysts highlight irregularities, accounting adjustments, or financial fluctuations that could impact future performance. 
• Strengthening Negotiations: Sellers and buyers can rely on the data from this report to justify asking prices and terms.
• Informed Decisions: By providing a clear view of sustainable earnings and financial risks, a QoE report equips buyers, investors, and business owners with the insights needed to make confident, well-informed decisions throughout the transaction process.

By uncovering the true financial health of a business through a QoE analysis, buyers, sellers, and financial professionals can better navigate transactions with transparency and reduced risk. 

How to Assess Quality of Earnings

When assessing a company’s quality of earnings, experts at Peak Business Valuation rely on the following process:

• Gather data. Analysts begin by gathering financial information from tax returns, balance sheets, and financial statements. 
• Analyze financial statements. Next, experts at Peak Business Valuation review these financial documents, searching for inconsistencies and other areas of concern.
• Conduct management interviews. Analysts speak with management to gain context around financial performance, accounting decisions, and any unusual or non-recurring transactions.
• Review accounting policies. Different accounting practices can lead to varying or misleading results. As such, analysts evaluate these practices to identify one-time adjustments or inflated figures.
• Identify risks. Last, assessing industry norms and unique characteristics of the business help to identify potential risk factors.

This approach ensures a thorough understanding of the company’s true earnings quality. By carefully applying each step, Peak Business Valuation provides an independent analysis to help professionals make informed decisions based on reliable financial insights.

Quality of Earnings Report vs. Business Valuation Report

While both QoE reports and business valuation reports are important financial tools, they serve different purposes. A quality of earnings report focuses on analyzing the accuracy and sustainability of a company’s earnings, helping buyers and investors understand the true profitability and cash flow quality. In contrast, a business valuation report estimates the overall fair market value of the company by considering financial performance, market conditions, and assets.

QoE findings often directly impact valuation by adjusting EBITDA or identifying risks that affect pricing and deal structure. Contact Peak Business Valuation to learn which report will best serve your purposes.

Conclusion

A quality of earnings report is an essential tool for learning the true financial health of a business beyond surface-level numbers. It provides valuable insights that help buyers, investors, and business owners make confident, informed decisions. By evaluating earnings sustainability, accounting practices, and potential risks, a QoE report reduces uncertainty in complex transactions. 

Peak Business Valuation is a trusted quality of earnings expert. We are happy to answer your questions and help you understand the true financial health of a business. Get started with a free consultation with Peak today!