Quality of Earnings (QoE) Analysis

A Quality of Earnings (QoE) analysis is a specialized financial review that examines the reliability, sustainability, and true economic reality behind a company’s reported earnings. Unlike a standard audit, which verifies that financial statements comply with accounting rules, a QoE digs into whether the numbers accurately reflect what the business actually produces — and whether those results can be expected to continue.

At Joey Friedman CPA PA, we provide independent QoE analyses for buyers, sellers, attorneys, and lenders engaged in mergers and acquisitions, business sales, investment transactions, and pre-sale planning. Our work gives decision-makers the confidence they need before committing to a transaction.

When a QoE Is Needed

A Quality of Earnings report is appropriate in a wide range of situations where financial clarity is critical:

• Business Acquisitions: Buyers need to know whether the seller’s EBITDA and cash flows are real, recurring, and free from manipulation before signing a purchase agreement.
• Investment Transactions: Private equity firms, family offices, and individual investors rely on QoE reports to validate financial representations and identify risks before deploying capital.
• Recapitalizations: When ownership is restructuring or bringing in new equity partners, a QoE provides an independent benchmark for negotiation.
• Lender Diligence: Banks and alternative lenders require confidence in a borrower’s true cash generation capacity before extending acquisition financing or refinancing existing debt.
• Pre-Sale Readiness: Business owners preparing to go to market benefit from a sell-side QoE to identify and address issues before a buyer’s team does — protecting deal value and reducing surprises during diligence.

Whether you are a buyer conducting diligence, a seller preparing for a transaction, or legal counsel advising a client through a complex deal, a QoE is an essential risk management tool. Our work supports business valuation engagements and complements forensic accounting investigations where financial integrity is in question.

What We Analyze

Our QoE process is thorough, practical, and written in plain English so that business owners, investors, and attorneys can act on the findings without needing a CPA to interpret every line.

• Revenue Quality: We examine whether revenues are one-time or recurring, whether they are recognized appropriately, and whether they reflect actual customer demand or timing manipulations such as channel stuffing or pre-billing.
• Customer Concentration: Heavy reliance on a small number of customers creates earnings fragility. We identify concentration risk and assess what happens to revenues if a key customer relationship changes.
• Margin Sustainability: Gross margins and operating margins can look strong in a single period but be unsustainable due to cost deferrals, supplier discounts, or temporary pricing advantages. We evaluate whether current margins can be maintained going forward.
• Normalization Adjustments: We identify and quantify owner-related expenses, non-recurring items, related-party transactions, and discretionary spending that should be added back to or subtracted from reported EBITDA to arrive at a true, transferable earnings figure.
• Working Capital Trends: Accounts receivable aging, inventory levels, and accounts payable patterns reveal cash flow dynamics that are invisible in profit and loss statements alone. We analyze working capital trends to assess cash conversion and identify potential hidden liabilities.

Deliverables

At the conclusion of a Quality of Earnings engagement, you receive a comprehensive, professionally prepared report package designed for use in transaction negotiations, financing discussions, and legal proceedings.

• Written QoE Report: A clear, organized narrative report summarizing findings, methodology, and conclusions — formatted for review by buyers, investors, lenders, and attorneys.
• Normalized EBITDA Schedule: A detailed calculation of adjusted EBITDA reflecting all normalization adjustments, presented in a format suitable for deal negotiations and financing applications.
• Adjustment Schedules: Supporting workpapers documenting each normalization adjustment with source data, rationale, and dollar impact, providing full transparency for all parties.
• Risk Flags: A clear summary of earnings quality concerns, operational risks, and financial statement issues identified during the engagement — giving buyers and lenders the information they need to price risk appropriately.
• Management Q&A Support: We are available to participate in management presentations and Q&A sessions, helping our clients interpret findings and respond to questions from counterparties during the negotiation process.

QoE vs. Audit vs. Valuation

These three engagements are often confused, but they serve distinct and non-interchangeable purposes.

An audit is a compliance exercise. Auditors verify that financial statements have been prepared in accordance with generally accepted accounting principles (GAAP). An audit does not assess whether earnings are sustainable, recurring, or representative of true economic performance — only that they were recorded correctly under accounting rules.

A Quality of Earnings analysis is a transaction-focused financial investigation. It looks behind the GAAP numbers to assess earnings quality, sustainability, and transferability. A QoE is specifically designed to answer the question a buyer, investor, or lender is actually asking: Can I rely on these numbers to make a sound decision?

A business valuation determines what a company is worth. A valuation typically depends on normalized earnings as one of its key inputs — which is why QoE and business valuation engagements are often conducted together or sequentially. A valuation without a solid QoE foundation may significantly overstate or understate true business value.

In transactions involving financial disputes or allegations of misrepresentation, a QoE may also intersect with forensic accounting — particularly when earnings manipulation or fraudulent financial reporting is suspected.

Why Joey Friedman CPA PA

Joey N. Friedman, CPA, ABV, MACC, MIB brings decades of experience at the intersection of financial analysis, business valuation, and forensic accounting. His credentials include Certified Public Accountant (CPA), Accredited in Business Valuation (ABV), a Master of Accounting (MACC), and a Master in International Business (MIB). He has served as an expert witness in financial and accounting matters, providing testimony and analysis in litigation contexts that demand the highest standards of rigor and documentation.

Our QoE work is conducted with the same independence and evidentiary discipline that characterizes our expert witness and forensic accounting practice. Every conclusion is supported by documented evidence, and every report is prepared to withstand scrutiny from opposing counsel, lenders, and sophisticated buyers.

Clients across Florida — including Delray Beach, Miami-Dade County, Broward County, and West Palm Beach — and nationally rely on Joey Friedman CPA PA for transaction diligence that is accurate, defensible, and delivered on the timelines that deals demand.

Schedule a QoE Consultation

If you are evaluating a business acquisition, preparing a company for sale, or advising a client through a transaction, contact us to discuss the scope and timeline of a Quality of Earnings engagement.

Direct Line: 954-290-5657
Office: 954-282-9615
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Frequently Asked Questions

What is a Quality of Earnings report?

A Quality of Earnings (QoE) report is a financial analysis that examines whether a company’s reported earnings accurately reflect its true, sustainable economic performance. It goes beyond what an audit verifies to assess whether earnings are recurring, free from manipulation, and representative of what a new owner or investor would realistically expect to receive going forward.

Who orders a QoE analysis?

QoE analyses are most commonly ordered by buyers in M&A transactions, private equity firms conducting investment diligence, lenders evaluating acquisition financing, and business owners preparing to sell who want to identify and address issues proactively. Attorneys advising clients in business sales or disputes also frequently engage QoE professionals to support negotiations or litigation.

How long does a QoE engagement take?

The timeline depends on the size and complexity of the business, the quality of available financial records, and management’s responsiveness to information requests. For most small to mid-size businesses, a QoE engagement typically takes two to six weeks from the time we receive complete financial data. We work to accommodate transaction timelines and can discuss expedited options when deadlines require it.

How is a QoE different from an audit?

An audit verifies that financial statements comply with accounting standards (GAAP). A QoE is a transaction-specific analysis that evaluates whether reported earnings are reliable, sustainable, and transferable to a new owner. Audited financials are often used as source data in a QoE, but having audited statements does not eliminate the need for a QoE — the two serve fundamentally different purposes.

What does “normalized EBITDA” mean?

Normalized EBITDA is a company’s earnings before interest, taxes, depreciation, and amortization, adjusted to remove non-recurring items, owner-related expenses, related-party transactions, and other items that would not continue under new ownership. It represents the most accurate starting point for business valuation and pricing negotiations in an M&A transaction.

Do I need a QoE if the business has audited financial statements?

In most transactions, yes. Audited statements confirm accounting compliance but do not assess earnings quality, sustainability, or the appropriateness of management’s accounting choices from a buyer’s or lender’s perspective. A QoE asks different questions and serves a different purpose — even when audited financials are the starting point for the analysis.

Can a QoE be used in litigation or dispute resolution?

Yes. A QoE conducted by a qualified CPA with expert witness experience can serve as the basis for damages calculations, representations and warranties claims, or disputed earnout determinations in post-closing litigation. Our firm’s background in forensic accounting and expert witness testimony positions us to produce QoE work that is defensible in legal proceedings. For any dispute involving financial analysis, contact the firm to discuss your specific situation.

What businesses are typically covered in a QoE engagement?

We work across a broad range of industries including professional services, healthcare, manufacturing, distribution, retail, real estate, and technology businesses. QoE engagements are most common for businesses with revenues between $1 million and $100 million, though the analysis is valuable for transactions of any size where financial clarity is needed before a commitment is made.