If you're heading into a sale process, a Quality of Earnings report is the single document that will most affect your enterprise value. It's also the document founders understand the least going in. Here's what's actually inside one, and how to make sure yours doesn't surface surprises.
What QoE actually does
QoE is a forensic exercise that strips reported EBITDA down to a 'normalised, sustainable' number. The buyer's offer is a multiple of that adjusted figure, not your reported number. A $1m downward adjustment at a 10x multiple costs you $10m of headline price.
The five things buyers always probe
- Revenue recognition — is it ASC 606 / IFRS 15 compliant, or are you booking annual contracts as upfront revenue?
- Customer concentration — top 10 customers as a percentage of revenue, churn risk on each.
- Working capital normalisation — what's the true 12-month average, stripped of seasonality and one-offs?
- Add-backs — owner compensation, one-time legal, abandoned product lines. Buyers reject 30–50 percent of seller-proposed add-backs.
- Cohort retention — gross and net revenue retention by acquisition cohort.
Clean up before, not during
The single highest-ROI use of a fractional CFO in the 6–12 months before a process is preparing the data so that the buyer's QoE provider finds nothing to argue about. Every adjustment they propose unprompted is a credibility hit.