Shepi — AI Quality of Earnings Software for SMB M&A

A practical reference for Quality of Earnings and M&A terminology. Each definition links to deeper guides so you can move from "what does this mean?" to "how do I use it?" quickly.

Quality of Earnings

Quality of Earnings(QoE): A financial analysis that evaluates whether a company's reported earnings are sustainable, recurring, and accurately stated. A QoE report goes beyond GAAP net income to identify adjustments and present normalized earnings a buyer can reasonably expect post-close. See What Is a Quality of Earnings Report?.
Quality of Revenue: A component of QoE analysis that examines how reliable and repeatable a company's revenue is. It looks at customer concentration, recurring vs. one-time revenue, revenue recognition policies, and pricing trends. Read more in Revenue Quality Analysis for M&A.

EBITDA Terms

Earnings Before Interest, Taxes, Depreciation, and Amortization(EBITDA): A profitability metric that starts with net income and adds back interest, taxes, depreciation, and amortization. EBITDA is widely used in M&A as a proxy for operating cash flow and as the basis for valuation multiples.
Adjusted EBITDA: EBITDA normalized for non-recurring, non-operating, and owner-related items. Adjusted EBITDA is the headline number in most QoE reports because it reflects the company's true, ongoing earning power. Learn the categories in EBITDA Adjustments: Types, Examples & Best Practices.
EBITDA Bridge: A schedule that reconciles reported net income to adjusted EBITDA, walking through each add-back and normalization. It is one of the most important sections of a QoE report. See EBITDA Bridge — Net Income to Adjusted EBITDA.
EBITDA Add-Backs: Expenses or losses added back to EBITDA because they are non-recurring, non-operating, or personal to the current owner. Common examples include one-time legal fees, owner salary above market rate, and personal expenses run through the business.
Run-Rate EBITDA: A forward-looking EBITDA figure that annualizes recent performance or applies pro forma adjustments to show what EBITDA would be under new ownership. Use it carefully — it can overstate earnings if not supported by evidence. More in Run-Rate EBITDA vs Historical EBITDA.
Trailing Twelve Months(TTM): The most recent 12-month period of financial performance. TTM figures are commonly used in M&A because they reflect the current state of the business better than a single fiscal year.
Last Twelve Months(LTM): Synonymous with TTM in most M&A contexts. LTM EBITDA or LTM revenue refers to the trailing 12-month financial results ending on the most recent reporting date.

Working Capital

Net Working Capital(NWC): Current assets minus current liabilities, typically excluding cash and debt-like items. NWC represents the capital required to operate the business day-to-day. Dive deeper in Working Capital Analysis & NWC Peg.
NWC Peg: The normalized level of net working capital that the buyer expects the seller to deliver at closing. If actual NWC at close is below the peg, the purchase price is typically reduced dollar-for-dollar. See Working Capital Analysis & NWC Peg.
Days Sales Outstanding(DSO): The average number of days it takes a company to collect payment from customers after a sale. Rising DSO can signal collection problems or revenue-quality issues.
Days Payable Outstanding(DPO): The average number of days a company takes to pay its suppliers. An unusually high DPO may indicate stretched payables that will normalize after a transaction.
Days Inventory Outstanding(DIO): The average number of days inventory sits before being sold. DIO is a key input to the cash conversion cycle and working capital analysis.

Analysis Concepts

General Ledger Review: A detailed review of the general ledger to find unusual transactions, personal expenses, related-party activity, and other adjustments. GL review is a core part of QoE analysis. See General Ledger Review for Due Diligence.
Cash Proof Analysis: A reconciliation of book cash activity to bank statements to verify that reported cash flows are supported by third-party evidence. It helps detect unrecorded liabilities and commingled expenses. More in Cash & Bank Tie-Out Guide.
Customer Concentration Risk: The risk that a large portion of revenue depends on a small number of customers. High concentration can reduce valuation multiples and increase deal risk. Read Customer Concentration Risk Analysis.
Owner Compensation Normalization: The process of adjusting owner salary, benefits, and distributions to a market-rate replacement cost. This is one of the most common EBITDA add-backs in lower-middle-market M&A. See Owner Compensation Normalization.
Personal Expense Detection: The process of identifying personal or discretionary expenses run through the business so they can be removed from normalized EBITDA. Learn the methods in Personal Expense Detection.
Earnings Manipulation: Actions taken to inflate or smooth reported earnings, such as aggressive revenue recognition, expense timing, or hidden reserves. A QoE analysis is designed to detect these signals. More in Signs of Earnings Manipulation.
Financial Red Flags: Warning signs in revenue, expenses, balance sheets, cash flows, or the general ledger that suggest deeper diligence is needed. See Financial Red Flags Checklist.

Deal & Report Terms

Seller's Discretionary Earnings(SDE): A measure of small-business cash flow that adds back owner's salary, benefits, and discretionary expenses to pretax net income. SDE is common in main-street and small-business brokerage, while adjusted EBITDA is more common in lower-middle-market M&A. More in SDE vs Adjusted EBITDA.
Due Diligence: The investigation a buyer conducts before acquiring a business. Financial due diligence includes QoE analysis, working capital review, debt and liability identification, and management interviews. See Financial Due Diligence Checklist for M&A.
QoE Report Template: A standardized structure for presenting QoE findings, typically including an executive summary, EBITDA bridge, revenue and expense analysis, working capital schedule, and proof of cash. See QoE Report Template & Structure.
Sell-Side QoE: A Quality of Earnings report prepared by the seller before going to market. It helps sellers control the narrative, identify issues early, and accelerate buyer diligence. Compare with buy-side QoE in Sell-Side vs Buy-Side QoE.
Buy-Side QoE: A Quality of Earnings analysis commissioned by the buyer to validate the target's earnings and identify risks before closing. See Sell-Side vs Buy-Side QoE.