What’s a Quality of Earnings (QoE) Report — and Do I Need One?

In the world of M&A, few documents carry as much weight — or scrutiny — as the Quality of Earnings (QoE) report. For software founders and tech CEOs preparing for a sale, growth capital raise, or strategic acquisition, understanding the purpose and power of a QoE report can be the difference between a smooth transaction and a value-eroding negotiation.

But what exactly is a QoE report? And more importantly, do you need one?

What Is a Quality of Earnings (QoE) Report?

A Quality of Earnings report is a financial due diligence document that analyzes the sustainability and accuracy of a company’s earnings. Unlike a standard audit, which focuses on compliance with accounting standards, a QoE report digs into the economic reality behind the numbers — isolating recurring revenue, normalizing EBITDA, and identifying risks or anomalies that could impact valuation.

In essence, it answers a critical buyer question: “How much of this company’s earnings are real, repeatable, and reliable?”

Key Components of a QoE Report

• Adjusted EBITDA Analysis: Normalizes earnings by removing one-time items, owner compensation, and non-operating expenses.
• Revenue Quality: Breaks down revenue by type (recurring vs. non-recurring), customer concentration, and churn.
• Working Capital Trends: Assesses whether the business is generating or consuming cash through its operations.
• Accounting Policy Review: Evaluates revenue recognition, capitalization practices, and other policies that may differ from buyer expectations.
• Customer and Contract Analysis: Reviews key contracts, renewal terms, and deferred revenue liabilities.

For SaaS and software companies, where deferred revenue, ARR, and customer retention are central to valuation, a QoE report often includes a deep dive into metrics like net revenue retention (NRR), CAC payback, and gross margin by cohort.

Why Buyers (and Sellers) Rely on QoE Reports

Traditionally, QoE reports were commissioned by buyers — especially private equity firms — to validate the financial health of a target company. But increasingly, sellers are commissioning their own “sell-side” QoE reports to preemptively address concerns, accelerate diligence, and support valuation.

Here’s why:

1. Supports a Higher Valuation

Buyers pay for confidence. A well-prepared QoE report can justify a premium multiple by demonstrating that earnings are not only accurate but also sustainable. For example, if your reported EBITDA is $3.2M, but a QoE analysis shows normalized EBITDA of $3.8M after adjusting for one-time legal fees and founder salary, that delta can materially impact deal value.

2. Reduces Surprises During Diligence

Surprises kill deals — or at least delay them and erode trust. A sell-side QoE allows you to identify and address red flags before a buyer finds them. This proactive approach can prevent retrading (i.e., buyers lowering their offer post-LOI) and keep the deal timeline on track.

3. Strengthens Negotiating Position

Armed with a QoE report, sellers can enter negotiations with a clear, defensible financial narrative. This is especially important in competitive processes where multiple buyers are evaluating the opportunity. Firms like iMerge often use QoE findings to craft compelling CIMs and guide valuation discussions.

4. Accelerates Buyer Diligence

Buyers appreciate when a seller has already done the heavy lifting. A credible QoE report can shorten the diligence cycle, reduce the need for redundant analysis, and increase buyer confidence — all of which can lead to faster closings and better terms.

Do You Need a QoE Report?

The short answer: If you’re preparing for a transaction north of $5M in enterprise value — especially in the software or SaaS space — a QoE report is not just helpful, it’s often expected.

Here are a few scenarios where a QoE report is particularly valuable:

• You’re preparing to sell your software company and want to maximize valuation and minimize deal friction.
• You’re raising growth capital and need to present a credible financial story to institutional investors.
• You’ve received inbound interest from a strategic or PE buyer and want to level the playing field during diligence.
• You’re planning an exit in 12–24 months and want to identify and fix financial issues in advance.

In fact, as we noted in Completing Due Diligence Before the LOI, early preparation — including a QoE — can significantly improve your leverage and reduce the risk of post-LOI renegotiation.

What Does a QoE Report Cost — and Who Prepares It?

QoE reports are typically prepared by specialized accounting or advisory firms with M&A experience. Costs can range from $25,000 to $100,000+ depending on the complexity of the business, the scope of analysis, and the size of the deal.

For software companies with recurring revenue, deferred revenue liabilities, and complex customer contracts, it’s critical to work with a firm that understands SaaS metrics and industry benchmarks. At iMerge, we often coordinate with QoE providers to ensure alignment between financial diligence and market positioning — especially when preparing for a competitive process.

QoE vs. Audit: What’s the Difference?

It’s a common misconception that a financial audit is equivalent to a QoE report. In reality, they serve different purposes:

• Audit: Focuses on compliance with GAAP and historical accuracy.
• QoE: Focuses on the economic reality of earnings and forward-looking sustainability.

Think of an audit as a rearview mirror, while a QoE is more like a windshield — helping buyers see what’s ahead.

Final Thoughts

In today’s M&A environment — where buyers are increasingly sophisticated and valuation multiples are under pressure — a Quality of Earnings report is more than a checkbox. It’s a strategic tool that can enhance credibility, reduce risk, and unlock value.

Whether you’re preparing to sell, raise capital, or simply want to understand your company’s true earnings power, a QoE report is worth serious consideration. And if you’re unsure where to start, an experienced M&A advisor can help you scope the right level of diligence for your goals.

Founders navigating valuation or deal structuring decisions can benefit from iMerge’s experience in software and tech exits — reach out for guidance tailored to your situation.