August 3, 2026 |Business Advisory Services
Quality of Earnings Checklist Before a QoE Review
Although both parties examine the same financial records, they approach them with different objectives.
Review Area | Seller’s Priority | Buyer’s Priority |
|---|---|---|
Revenue | Prove that recent sales are repeatable | Test whether sales are likely to continue |
EBITDA | Provide evidence for proposed normalizations | Remove weak or overstated add-backs |
Customers | Show stable relationships and retention | Measure exposure to major accounts |
Expenses | Explain costs that are not part of normal operations | Determine which costs will continue after closing |
Working Capital | Establish a reasonable historical benchmark | Estimate how much operating capital the business will require |
Cash Flow | Show that profit produces usable cash | Examine the consistency of cash conversion |
Records | Present complete and organized support | Confirm that management’s explanations match the evidence |
Preparing the Business for QoE Due Diligence
Step 1: Assemble the Core Financial Records
Collect monthly financial statements, tax returns, bank statements, payroll reports, contracts, debt records, and operational schedules. Organize them by period so reviewers can follow the history without unnecessary delays.
Step 2: Match the Numbers Across Different Records
Compare the general ledger with the financial statements, tax filings, and supporting schedules. Differences should be explained before documents are shared with a buyer.
Step 3: Build a List of Possible Earnings Normalizations
Review owner-related costs, transaction expenses, unusual income, legal fees, and other items that may not represent future operations. Do not assume that every unusual cost qualifies as an add-back.
Step 4: Create Evidence for Every Proposed Adjustment
Attach invoices, payroll information, agreements, or transaction details to each adjustment. A clear explanation supported by documents is more persuasive than a spreadsheet entry alone.
Step 5: Study the Sources of Revenue
Separate repeat customers from temporary sales and identify how much revenue comes from the largest accounts, locations, or service lines. This helps explain whether recent performance is broad-based or dependent on a limited number of sources.
Step 6: Examine Cash Needs and Working Capital Patterns
Review collections, vendor payments, inventory levels, deferred revenue, capital spending, and seasonal changes. The aim is to understand how much cash the business normally requires to operate.
Step 7: Resolve Financial Warning Signs
Investigate sudden margin changes, inconsistent account classifications, old receivables, recurring exceptional costs, and missing records. Questions are easier to answer before the transaction reaches a critical stage.
Step 8: Perform an Internal Buyer-Style Review
Ask someone who was not responsible for preparing the records to challenge the assumptions and supporting evidence. This can expose unclear explanations before an external reviewer raises them.
Common Questions About QoE Checklists
How is a Quality of Earnings checklist used?
It provides an organized framework for examining the records, transactions, and operating factors that shape reported profit. The checklist also helps teams track missing information and unresolved financial questions.
Which records are normally requested during a QoE engagement?
The requested materials often include monthly and annual financial statements, tax filings, general ledger detail, bank activity, payroll records, customer contracts, lease documents, debt agreements, and schedules supporting management adjustments.
Which parts of a business receive the most attention?
Reviewers typically focus on revenue consistency, customer dependence, operating costs, EBITDA normalizations, cash conversion, working capital, liabilities, accounting methods, and the quality of the supporting records.
Which adjustments are commonly considered?
Possible adjustments may involve documented transaction costs, certain personal expenses, compensation above or below market levels, or costs connected to an isolated event. Each item must still be reviewed on its own facts.
What determines the length of the review?
The schedule is influenced by the size of the business, the number of entities and locations, the condition of the accounting records, the scope of the work, and how quickly management answers follow-up questions.
What type of professional handles this analysis?
QoE work is generally completed by specialists with experience in transaction accounting, financial due diligence, earnings normalization, and business performance analysis.
Should a seller complete a QoE review before entering the market?
It is not mandatory in every sale. However, an early review may help the owner find unsupported adjustments, reconcile inconsistent accounts, and prepare clearer answers for potential buyers.
Why can QoE findings change the valuation discussion?
The analysis may change the amount of normalized EBITDA, reveal future cash requirements, or identify risks that affect the buyer’s confidence. These findings can influence both the earnings base and the multiple used during negotiations.
Get a Clearer View of Your Financial Performance
QMK Consulting works with franchise businesses and multi-location operators to evaluate the financial drivers behind profit, liquidity, and operating results. Request a free profit and cash flow analysis to uncover potential concerns and prepare for better-informed business or transaction decisions.
