A Quality of Earnings report is the documented examination capital partners underwrite against. It is not a single opinion on the numbers. It is a structured document that tests reported EBITDA against eight adjustment categories and produces a defended EBITDA range, typically across 40 to 80 pages and 24 to 36 months of financial data.
This article walks through the standard components of a QofE report, how the document is structured section by section, the difference between a sell-side and a buy-side report, what a Quality of Earnings report sample contains, the common findings that surface, and how the TEOL QofE Pre-Read prepares a business before the full report begins.
A Quality of Earnings report is a documented institutional examination of EBITDA defensibility, prepared by an independent transaction advisory firm to test reported earnings against eight adjustment categories. The report typically runs 40 to 80 pages, examines 24 to 36 months of financial data, and produces a defended EBITDA range that capital partners use to underwrite a transaction. The report does not assert a number. It evidences one, line by line, so the EBITDA that drives the multiple survives examination rather than collapsing under it. Where the Financial Truth Ladder reads how defensible the underlying numbers are, the report is where that defensibility is documented.
A QofE report is structured as a sequence of sections that move from the headline range to the evidence behind it. Each section carries a defined purpose, a typical page range, and a key output, and together they sum to the 40 to 80 page document a capital partner reads. Select a section to see its purpose and the page range it occupies in the report spine.
The executive summary is read first because it states the defended EBITDA range and the material findings, then frames how every schedule that follows supports or qualifies that range. On a sell-side report it sets the position the seller intends to defend. On a buy-side report it states the exposure the acquirer intends to price.
Defended EBITDA range and material findings
| Section | Purpose | Typical Pages | Key Outputs |
|---|---|---|---|
| Executive Summary | States the defended EBITDA range and the material findings | 4 to 6 | Defended EBITDA range |
| EBITDA Reconciliation | Ties reported EBITDA to management accounts and ledgers | 6 to 10 | Reconciled base EBITDA |
| Adjustment Schedules | Documents the eight adjustment categories, each evidenced | 18 to 28 | Categorized add-back schedule |
| Revenue and Cost Analysis | Tests recognition treatment and gross margin defensibility | 8 to 14 | Margin and revenue quality read |
| Working Capital Analysis | Normalizes the trailing trend and defends the seasonality | 6 to 10 | Defended working capital trend |
| Concentration Analysis | Measures top customer and top five revenue share | 4 to 8 | Concentration risk profile |
| Defended EBITDA Bridge | Reconciles reported to defended EBITDA with evidence | 4 to 8 | Defended EBITDA bridge |
An institutional QofE report contains ten standard components. Each component is a defined section with its own evidence base, and a report missing any of them leaves a gap a buy-side examination will exploit. The ten components are the structural spine of the document.
The institutional methodology for preparing a quality of earnings report, from examining reported EBITDA through documenting add-back evidence, testing against institutional standards, building the defended bridge, and publishing the report.
Reconcile reported EBITDA to the management accounts and the underlying ledgers, because the examination begins from a number that ties to source rather than a figure carried forward from a pitch deck.
Assemble the supporting evidence for each add-back into a schedule, because the report defends only what it can document and institutional reviewers reject 30 to 50 percent of undocumented operator add-backs.
Test each adjustment against the eight institutional adjustment categories and the non-recurring, non-operational, and transferable standard, removing items that will not survive buy-side examination.
Construct the reconciliation from reported to defended EBITDA, with every adjustment categorized, quantified, and referenced to its supporting exhibit.
Compile the executive summary, adjustment schedules, concentration and working capital analyses, and findings memorandum into a report that capital partners can underwrite against.
Sell-side and buy-side QofE reports share the same structural framework but produce different outputs. Sell-side reports define and defend the EBITDA position. Buy-side reports test and challenge the position. The same data examined from opposite vantage points typically produces EBITDA estimates that diverge by 8 to 18 percent before negotiation, which is why a seller benefits from preparing the report first, as the sell-side QofE Pre-Read makes concrete.
| Dimension | Sell-Side QofE Report | Buy-Side QofE Report |
|---|---|---|
| Who Commissions | Seller | Acquirer |
| Timing | Pre-launch, 60 to 90 days | Post-LOI, 30 to 60 days |
| Cost Range | $75K to $250K | $100K to $300K |
| Strategic Purpose | Define and defend EBITDA | Test and challenge EBITDA |
| Output | Defended EBITDA position | Findings memorandum |
| Control | Seller defines narrative | Acquirer defines narrative |
A QofE report sample typically contains reconciliation tables, add-back schedules, customer concentration analysis, working capital trend charts, run-rate calculations, and a defended EBITDA bridge. Institutional reports include findings categorized by materiality and supporting evidence references, so a reviewer can trace any conclusion back to its source rather than accept it on assertion.
The detail an operator should expect is granular. Adjustment schedules reference invoices, board minutes, and contracts. Concentration tables name the share held by the top customer and the top five. The working capital section reads against the basis a buyer will peg to, which is the same discipline the eight adjustment categories set out in full.
Six findings recur in $20M to $100M operator diligence, and each carries a quantified impact on the defended EBITDA range. The findings compound, so a report that surfaces them early lets the seller resolve the exposure before a buy-side examination prices it. The percentages below are the typical impact each finding moves.
Institutional reviewers reject 30 to 50 percent of operator-claimed add-backs that lack documentation, which is the single most common finding in a Quality of Earnings report.
An undefended working capital trend, with seasonality unrevealed in the trailing-twelve-month figure, moves 8 to 18 percent of EBITDA through post-LOI repricing.
Concentration above institutional thresholds discounts EBITDA by 6 to 15 percent regardless of how clean the underlying adjustments are.
Volatile inventory valuation and inconsistent cost of goods sold move 4 to 10 percent of defended EBITDA when the cost base will not reconcile.
Cut-off discipline, deferred revenue, and milestone recognition inconsistencies move 3 to 8 percent when reported revenue flatters the period.
The same data examined from opposite vantage points typically produces EBITDA estimates that diverge by 8 to 18 percent before negotiation begins.
The full Quality of Earnings report is the document a counterparty underwrites against, but the work that determines what it can defend happens before it is commissioned. The QofE Pre-Read is a 30 to 45 day institutional examination of EBITDA quality across the eight adjustment categories, executed while the seller still controls timing. It surfaces and resolves the findings that would otherwise appear in a buy-side report, so the full report opens from a defended position rather than a contested one.
That preparation is read against the Reporting Under Scrutiny Model, quantified in the EBITDA Quality Calculator, and completed through pre-transaction finance preparation. Definitions for every term the report touches are held in the glossary, and the broader context sits in the Operating Library. The defense precedes the examination, and the examination precedes the multiple.
The components, the structure, and the supporting evidence are assembled before a buy-side examination begins. Run the QofE Pre-Read to surface the findings first, or open the preparation engagement.