Quality of Earnings Reviews - Why Business Owners Should Care!

By Dave Costello, TCV Growth Partner

If you're a business owner thinking about selling your company, attracting investors, or even acquiring another business, there's one financial tool you should absolutely know about: the Quality of Earnings (QoE) Review.

It’s not just another audit—it’s a deep dive into the real story behind your earnings. And whether you're on the buy-side or sell-side of a deal, understanding the quality of your earnings can make or break your next big move.

What Is a Quality of Earnings Review?

A Quality of Earnings (QoE) Review is a detailed financial analysis that evaluates how much of a company’s reported earnings are:

• Accurate

• Sustainable

• Recurring

  
  

Unlike a traditional audit, which checks for compliance with accounting standards, a QoE review focuses on the economic reality of the business. It helps you understand whether the profits you see on paper are truly reflective of ongoing operations—or if they’re inflated by one-time events, aggressive accounting, or other anomalies.

Why Business Owners Should Care

Let’s say you’re preparing to sell your business. You’ve worked hard to build it, and your financials look strong. But when potential buyers start digging, they’ll want to know:

• Are these earnings going to continue?

• Are there any hidden risks?

• Is the revenue truly recurring?

  
  

A QoE review helps you answer those questions confidently. It can:

• Justify your asking price

• Speed up the due diligence process

• Build trust with buyers or investors

• Identify areas for improvement before going to market

  
  

Even if you’re not selling, a QoE review can give you valuable insights into your business’s financial health and help guide strategic decisions.

What’s Included in a QoE Review?

Here’s what a typical QoE review covers—and why each part matters:

1. Revenue Analysis

This section breaks down your revenue streams to determine how much is recurring versus one-time. It also checks for proper revenue recognition practices.

Why it matters: Buyers want predictable income. If your revenue depends on a few big deals or seasonal spikes, that’s a risk they’ll factor into the valuation.

2. EBITDA Normalization

Reported EBITDA often includes non-operational items like lawsuit settlements, owner perks, or one-time expenses. A QoE review adjusts for these to show your true operating earnings.

Why it matters: Normalized EBITDA is often the basis for valuation. Inflated numbers can lead to unrealistic expectations—and deal breakdowns.

3. Working Capital Trends

This part looks at your current assets and liabilities to assess cash flow and operational efficiency.

Why it matters: Buyers often negotiate a working capital “peg” as part of the deal. Understanding your trends helps you prepare and avoid surprises.

4. Customer and Vendor Concentration

If your business relies heavily on a few customers or suppliers, that’s a concentration risk.

Why it matters: Diversification is attractive to buyers. High dependency can lower valuation or trigger deal contingencies.

5. Accounting Policies

The review checks for aggressive or inconsistent accounting practices that might distort earnings.

Why it matters: Transparency builds trust. Buyers want to know your numbers are clean and comparable to industry standards.

6. Debt and Liabilities

Hidden debts or off-balance-sheet obligations can derail a deal.

Why it matters: A QoE review brings these to light early, so you can address them proactively.

When Should You Get a QoE Review?

Here are some ideal times to consider a QoE review:

• Before selling your business: To prepare for buyer scrutiny and maximize valuation.

• Before buying a business: To validate the seller’s claims and avoid overpaying.

• Before raising capital: To give investors confidence in your financials.

• During strategic planning: To understand your earnings quality and identify areas for improvement.

  
  

Even if you’re not in a transaction, a QoE review can be a powerful internal tool.

Real-World Example: Why It Pays Off

Imagine you’re looking to acquire a marketing agency. Their financials show $2 million in EBITDA. But a QoE review reveals:

• $500,000 came from a one-time government grant.

• The founder’s salary is artificially low.

• Two clients account for 80% of revenue.

After adjustments, normalized EBITDA is closer to $1.2 million—and the risk profile is much higher. That insight could save you from overpaying or help you renegotiate the deal terms.

Choosing the Right Partner

A QoE review should be conducted by a reputable financial advisory or accounting firm with experience in your industry. Look for a team that:

• Understands your business model

• Has M&A experience

• Offers clear, actionable insights—not just spreadsheets

  
  

The right partner will help you tell a compelling financial story and navigate the complexities of a transaction with confidence.

Final Thoughts

As a business owner, your financials are more than just numbers—they’re the foundation of your company’s value. A Quality of Earnings Review helps you understand what those numbers really mean, and how they’ll be viewed by buyers, investors, or strategic partners.

Whether you’re preparing for a sale, planning for growth, or just want a clearer picture of your business’s financial health, a QoE review is a smart investment.

Ready to take a closer look at your earnings? Start with a conversation. Let the professionals at TCV Growth Partners help you find the right professional to conduct a QoE review for your business.  Reach out to me at dave@tcv-growth.partners to begin the conversation.  The insights you gain could be the key to your next big opportunity.