By Jonah Gjertson, Senior Consultant at Blue & Co.
Preparing to sell your business is a complicated, emotional, and logistically challenging decision with material financial implications. There are many decisions to consider before placing your business on the market. Should I engage a business broker for sell-side representation? Do I have the best fit for sell-side legal counsel? Will my financial statements hold up during the buyer due diligence analysis?
Preparing for the process of financial due diligence requests ahead of a sale accomplishes three main objectives:
- Avoiding surprises during due diligence
- Supporting your asking price for the business
- Speeding up the sale process
What Is a Quality of Earnings Report?
A Quality of Earnings (“QoE”) is a detailed financial analysis that digs deep into:
- Performance over a recent trailing twelve-month period (TTM) to provide a more recent analysis than a standard year-end audit or compilation
- Revenue trends and customer concentration
- Adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization)
- One-time or non-recurring expenses (add-backs)
- Working capital needs
- Industry-specific practices, benchmarks, and adjustments
Coming to the negotiation table with a recent view into your business’s performance, addbacks, and trends strengthens your position. It’s not just about what your business earns, it’s about how it earns it, and whether that performance is sustainable.
A QoE report does not provide formal assurance or constitute an audit or formal review of the financial statements. An audit focuses on the historical accuracy of the financial statements, and a QoE is a forward-looking analysis designed to evaluate the reliability of the company’s earnings.
Why Sellers Should Obtain a QoE Report
Buyers almost always commission a QoE report as part of due diligence; however, smart sellers get ahead of the game by preparing their own report before going to market. By doing so Sellers are able to achieve the following:
Avoid Surprises During Due Diligence
- Identify and fix issues early
- Prepare clean and consistent financials
- Provide accurate answers to tough buyer questions
Example: “When I was evaluating a franchised car dealership, a QoE report revealed that fixed operations salaries expense was misclassified as general salaries and wages. This misclassification, while not affecting the total net income, incorrectly inflated the dealership’s fixed absorption ratio, which led to downward changes in the buyer’s pro forma and valuation of the dealership, prolonging the negotiation and diligence process.”
Support Your Asking Price
- Highlight normalized earnings
- Back up add-backs with evidence
- Justify a higher valuation multiple
Example: “When I was evaluating a franchised car dealership, a QoE report that the Buyer commissioned revealed a used vehicle pack (an adjustment to the cost of sales for a vehicle) was not being considered by the Seller as an addback. The omission of this addback reduced the profitability of the used vehicle department and the dealership, reducing the overall value. If the Seller had commissioned a QoE report, they may have discovered that this pack was misclassified on the income statement and presented it as an addback, increasing the value of their dealership and boosting used vehicle gross profit.”
Speed Up the Sale Process
- Reduces back-and-forth with buyers
- Builds trust and credibility
- Makes your business easier to finance
Example: “When a Seller provides a QoE report with the initial financial due diligence, it allows the Buyer to create their buy-side pro forma income statement more quickly and will often result in fewer financial-related questions for the Seller. Additionally, if a buyer commissions their own QoE, the Seller’s report will be provided to the firm completing the Buyer’s analysis and will likely aid in their process.”
Most buyers, especially private equity or strategic acquirers, will come armed with a team of advisors. A QoE gives you confidence in the facts and helps you negotiate with confidence. Selling a closely held business is a once-in-a-lifetime event for many owners. A Quality of Earnings Report might sound like “extra homework,” but it’s really a tool to protect your legacy, maximize value, and keep you in the driver’s seat of negotiations.
Questions? We’re Here to Help.
Blue & Co. brings a combination of financial expertise, operational insight, and industry-specific advisory services to help entities navigate exactly the kind of transactions described in this article. Our approach to Quality of Earnings is comprehensive and tailored to the industry you serve. Contact a Blue & Co. advisor today.
About Us
Jonah Gjertson, Senior Consultant with Blue & Co., is a seasoned professional with a background in corporate development and business valuation. From 2022 to 2025, he served as a Corporate Development Analyst at Gee Automotive Companies, where he contributed to strategic growth initiatives within the retail automotive sector. His experience spans equity evaluation, financial modeling, and strategic consulting, and he has been praised for his analytical rigor and collaborative leadership in both academic and professional settings.
