Quality of Earnings
Quality of earnings (QoE) is an analysis that tests whether a company's reported profit reflects sustainable, repeatable cash earnings. It normalizes EBITDA for owner compensation, one-time items, personal expenses, and accounting distortions so a buyer, lender, or seller can price the business on earnings that will actually persist after closing.
3 yrs + TTM
Typical period analyzed
100%
GL transactions Shepi scans
$1,000
Shepi per-project pricing
What Is Quality of Earnings?
A quality of earnings analysis answers one question: how much of the reported profit is real, recurring, and transferable to a new owner? Reported EBITDA on a small or lower-middle-market company is rarely the number a buyer should underwrite. Owner salary may be above or below market. Personal vehicles, travel, and family payroll sit inside operating expense. A one-time legal settlement or PPP-era grant may inflate a single year. Revenue may be recognized on cash basis, or concentrated in one customer who is leaving.
The QoE strips those distortions out and rebuilds an adjusted, run-rate EBITDA supported by evidence — bank statements, the general ledger, payroll registers, and contracts — not by management assertion.
Why Quality of Earnings Matters
Price protection
At a 4x multiple, a $150K overstatement of EBITDA is a $600K overpayment
Lender requirement
Most acquisition lenders require independent earnings analysis above a deal-size threshold
Faster close
A sell-side QoE answers buyer questions before they become renegotiation leverage
Risk discovery
Customer concentration, margin erosion, and deferred maintenance surface before, not after, closing
What's Inside a Quality of Earnings Analysis
| Workstream | What it tests | Typical outcome |
|---|---|---|
| EBITDA adjustments | Owner comp, personal expenses, one-time items, related-party rent | A defensible adjusted EBITDA by period |
| Proof of cash | Do book revenues tie to bank deposits, month by month? | Confirmation the books reflect real money |
| Revenue quality | Recurring vs one-time, concentration, pricing vs volume | A view of which revenue survives the sale |
| Working capital | Normalized level required to run the business post-close | A working capital peg for the purchase agreement |
| GL review | Anomalies, reclassifications, journal-entry patterns | Unsupported entries surfaced before closing |
| Red flags | Earnings-management signals and unsupported entries | A risk list for pricing and negotiation |
Deep dives on each workstream: EBITDA adjustments, proof of cash, revenue quality, working capital, general ledger review, and financial red flags.
How the Analysis Works
Collect the source data
Three years plus TTM of P&L, balance sheet, general ledger, bank and credit card statements, payroll, and tax returns.
Normalize the books
Map the chart of accounts, resolve sub-accounts, and reconcile the trial balance to the financial statements.
Test cash
Tie recorded revenue and expense to bank activity to confirm the books reflect real money movement.
Build the adjustment schedule
Each proposed add-back is documented with the transactions and evidence that support it.
Assemble the EBITDA bridge
Reported EBITDA to adjusted EBITDA, one line per adjustment, per period.
Deliver the report
Narrative report plus a working Excel model a lender or buyer's advisor can audit.
Quality of Earnings vs Audit vs Valuation
| Quality of Earnings | Audit | Valuation | |
|---|---|---|---|
| Question answered | Is this EBITDA sustainable? | Are the statements fairly presented? | What is the business worth? |
| Period focus | Trailing 3 years + TTM | Fiscal year | Point in time |
| Output | Adjusted EBITDA + evidence | Opinion letter | Value conclusion |
| Typical buyer | Acquirer, lender, seller | Regulator, board, bank covenant | Owner, court, tax filing |
| Timeline | Days to weeks | Weeks to months | Weeks |
A QoE is not an audit and does not produce an audit opinion. See the full breakdown in QoE vs audit.
Who Needs a Quality of Earnings Analysis
Independent searchers & ETA buyers
SBA-financed acquisitions where the lender wants third-party earnings support
Lower middle market PE
Platform and add-on diligence on companies with unaudited books
Sellers and brokers
Sell-side QoE that defends the asking multiple before the market sees the deal
CPA and advisory firms
Firms delivering diligence engagements who want the mechanical work automated
Cost and Timeline
Traditional CPA-led QoE engagements run $20,000–$100,000 over four to eight weeks. Shepi's per-project engagement is $1,000 and produces first-pass analysis in hours. Full breakdown on the QoE cost page.