A quality of earnings (QoE) report is a financial analysis that tests whether the profit a business claims to generate is real, sustainable, and correctly stated. In Australian business sales, it is most commonly commissioned by a buyer’s advisors during due diligence — but increasingly, sellers are commissioning their own before going to market. The difference between those two approaches is significant, and understanding it can mean the difference between a clean deal and a renegotiated price six weeks before settlement.
What Is a Quality of Earnings Report?
A quality of earnings report examines a business’s earnings from first principles. It goes behind the profit-and-loss statement to ask: what drove this profit, will it continue, and are the numbers presented fairly? It is not an audit. An audit confirms that financial statements comply with accounting standards. A QoE goes further — it examines whether the profit is real for a buyer’s purposes, which is a different question entirely.
A QoE report prepared for an Australian SME sale typically covers three to five years of historical financials, with particular attention to the most recent 12 to 24 months. The analyst looks at revenue quality (contracted vs. ad hoc, concentrated vs. diversified), normalised EBITDA (adjusted for owner perks, one-off items, related-party transactions, and non-recurring costs), working capital trends, and the reliability of the management accounts.
Most Australian businesses in the $2M–$15M revenue range carry EBITDA figures that require significant normalisation before they mean anything to a buyer. Owner salaries drawn at non-market rates, personal expenses through the business, and one-off revenue events are all common — and all need to be unpacked. The EBITDA add-back process is documented separately in the EBITDA add-backs guide, but a QoE report goes deeper than add-backs alone.
Sell-Side vs Buy-Side: Who Commissions It, and Why It Matters
Traditionally, a buyer commissions the QoE report after signing heads of agreement. Their advisors spend several weeks testing the seller’s numbers — and if they find problems, the buyer uses those findings to reduce the price, extend the settlement period, or walk away.
A sell-side QoE flips that dynamic. The seller commissions the report before going to market, works through any issues in private, and presents audited numbers to buyers from day one. It is a pre-emptive strike (and worth every dollar if your books have any complexity in them).
I saw this play out clearly with a Western Australian engineering services business that went to market a couple of years ago. The owner had been drawing a $250,000 salary, running several personal vehicle costs through the business, and had a large one-off subcontractor cost in year two that wasn’t recurring. His P&L showed $800,000 EBITDA. His normalised EBITDA, once a sell-side QoE had been run, was $1.1M. He went to market with a $1.1M EBITDA figure backed by documentation. Buyers didn’t argue with it. The deal settled at a 4.2x multiple — about $4.6M — with no price renegotiation at due diligence.
Had he gone to market with the stated $800,000, buyers would have run their own QoE and arrived at roughly the same $1.1M figure — but they’d have presented the gap as a discovery and used it to negotiate hard. The seller would have ended up at the same normalised number, but through a defensive process rather than an offensive one.
What a Quality of Earnings Report Actually Examines
The scope of a QoE varies by deal size and complexity, but Australian SME transactions typically cover the following:
Earnings normalisation. The analyst rebuilds your EBITDA from the raw financials, removing owner-specific costs and adding back legitimately one-off items. This is the core of the report. A well-prepared EBITDA add-backs schedule going into due diligence will make this process faster and more favourable.
Revenue quality and sustainability. Where does the revenue come from? Is it contracted or discretionary? Recurring or project-based? Concentrated in one or two customers (which a buyer prices as risk) or spread across a broad base? Australian businesses with more than 20 percent of revenue in a single customer routinely receive a lower multiple, and a QoE report quantifies exactly why.
Working capital analysis. How much working capital does the business need to operate, and does that change seasonally? This affects the completion accounts adjustment — a common source of late-deal disputes in Australian business sales. The working capital adjustment is its own topic, but a QoE report is where the buyer first forms a view on what “normal” working capital looks like for your business.
Management accounts reliability. Are the monthly management accounts produced promptly and consistently? Do they reconcile to the annual financials? Businesses that can’t answer yes to both of those questions give buyers a reason to discount the price or request a longer due diligence period.
One-off and non-recurring items. Revenue spikes, cost windfalls, insurance receipts, and litigation settlements all need to be identified and properly treated. A buyer won’t pay a recurring multiple on a non-recurring profit.
When Should You Commission a QoE Report?
If you’re commissioning a sell-side QoE, the right time is six to twelve months before going to market — or at the latest, before you start having conversations with buyers. You want time to address anything the report surfaces, not to be explaining it in a data room under pressure.
A buy-side QoE is typically commissioned after heads of agreement are signed and before the formal due diligence period closes. Buyers in Australian transactions usually allow 30 to 60 days for this work (part of the broader due diligence process).
If a buyer is pushing for a compressed timeline — two or three weeks — that’s a flag worth raising with your advisor. A thorough QoE can’t be done in two weeks on a business of any complexity.
How Much Does a Quality of Earnings Report Cost in Australia?
For Australian SME transactions, expect to pay $15,000 to $50,000 for a QoE report, depending on business complexity, number of entities, and deal size. A straightforward services business with clean accounts and a single entity structure sits at the lower end. A business with multiple entities, complex revenue recognition, or year-on-year ownership changes sits at the higher end.
The cost sounds significant until you compare it with what it protects. A one-percent price reduction on a $5M deal is $50,000. A poorly explained EBITDA figure that gives a buyer grounds to negotiate costs far more than the report. (I have seen buyers reduce offers by $300,000 to $500,000 citing “earnings quality concerns” — which often means they found something the seller hadn’t disclosed, or hadn’t explained, rather than anything that was genuinely wrong.)
QoE vs. an Audit: The Key Difference
An audit gives you a clean set of financials that comply with accounting standards. A quality of earnings report tells a buyer whether those financials accurately represent the business’s earning power going forward. They are answering different questions.
A business can have audited financials and still have a poor quality of earnings — because the audit confirms historical accuracy under accounting rules, while the QoE assesses economic substance and forward repeatability. Many Australian SMEs have never been audited (there’s no requirement for private companies under certain thresholds), and the absence of audited accounts isn’t a deal-killer. A QoE report, in that context, does some of the work an audit would have done while going further on the forward-looking analysis.
How to Prepare Your Business for a QoE
The best preparation is the same as general sale preparation: three years of clean, reconciled financials; management accounts that tell a consistent story; and a clear schedule of any add-backs with supporting documentation. The vendor due diligence process covers this in more detail, but the short version is: surprise findings in a QoE almost always trace back to record-keeping gaps, not intentional misrepresentation. Fix the records before you need to defend them.
If your business has had a particularly strong year — a large one-off contract, an insurance payout, a cost that won’t recur — note it yourself. Don’t wait for the buyer’s analyst to find it. A seller who proactively explains abnormalities is a seller who controls the narrative. A seller who has abnormalities discovered during a QoE review is a seller who spends the next two weeks answering increasingly pointed questions. The information memorandum and the preparing your business for sale guide both address this, but it bears repeating here: transparency early is cheaper than transparency under pressure.
Getting the Right Advice
A quality of earnings report is not something you navigate on your own. If you’re selling a business worth $2M or more, you want a corporate advisor involved before the buyer’s QoE team arrives — or better, before you go to market at all. The advisor can either run the sell-side QoE or manage the process when a buyer’s team arrives with one.
If you’d like to understand how the QoE process fits into a broader sale strategy for your business, get in touch or use the valuation calculator to get a starting point on what your business might be worth.
Note for editors: Internal links to add FROM existing articles — due-diligence-checklist-selling-business (anchor: “quality of earnings review”), ebitda-add-backs-selling-business-australia (anchor: “quality of earnings report”), vendor-due-diligence-selling-business-australia (anchor: “quality of earnings analysis”).