What is a Quality of Earnings report (or QoE)?

If you are thinking about selling your agency, you need to understand the role played by a Quality of Earnings report. First, what is it?

Typically a QoE is a report that is commissioned by the buyer. The report is prepared by an outside accounting firm, oftentimes ones that specialize in preparing these reports. The reason for this is because smart buyers don’t pay for revenue—they pay for reliable, sustainable profit.

💥 That will hold up when scrutinized by other investors 💥

This is the key for a seller. More often than not, the QoE will adjust EBITDA. Sometimes it’s up, sometimes it’s down. To be clear, the buyers are not trying to screw the seller over, using the downward adjusted EBITDA to justify a lower price.

The QoE is simply adjusting the EBITDA to ensure that it is fair, accurate and in accordance with GAAP because that’s the standard to which the buyer will be subjected to. And those standards are typically higher than what the seller has been using when managing their business.

So, if you are a seller:

1) Recognize and accept that a QoE is going to be inevitable. Buyers are unlikely to transact without one (unless the acquisition is very, very small)

2) Be prepared for EBITDA to be adjusted. It might be the same, it might even go up. But mentally prepare for it to go down.

If you have questions about QoE, feel free to reach out to us.