Quality of Earnings: The Key to a Successful Business Acquisition

Team Acquira
-  July 3, 2023
What You’ll Learn
  • Understanding QoE's role in business acquisitions.
  • The value of transparent financial reporting in acquisitions.
  • Key components evaluated in a QoE analysis.
  • Services offered by Acquira to make your acquisition much more likely to succeed.
  • How Acquira's QoE analysis protects buyers from potential pitfalls.

Navigating the complex world of business acquisitions as a small business owner is no simple task. 

One of the most crucial elements to comprehend is the quality of earnings (QoE), a vital determinant of a company's financial health. 

An analysis of the quality of earnings provides an in-depth perspective on the company's earnings, emphasizing the extent to which those earnings are sustainable, consistent, and reliable over time.

A QoE report isn't a simple restatement of what's presented in the financial statements. Instead, it goes beyond the surface-level numbers to uncover the real drivers of cash flow and profits.

Recognizing the Value of QoE

quality of earnings due diligence

Understanding and analyzing QoE correctly can lead to a successful acquisition, laying a solid foundation for future profitability and growth.

However, potential acquirers often face a daunting challenge when evaluating a target company's financial performance. 

Financial statements are like an ocean of numbers, ratios, and percentages that can be overwhelming and misleading if not properly understood. 

Small discrepancies or misinterpretations can significantly affect the valuation of a business, leading to significant over or underestimations.

Transparent and accurate financial reporting is a key weapon in an acquirer's arsenal, crucial for assessing the true value of a business. 

Transparent reporting ensures that the earnings reported are accurate and complete, free of any manipulation or bias. It forms a bedrock of trust between the seller and the buyer.

QoE Explained in More Detail

Now, let's delve into the realm of QoE. 

In simple terms, the quality of earnings refers to the portion of a company's income that is predictable, sustainable, and can be expected to continue in the future. 

In the context of business acquisitions, QoE is the measure that helps potential acquirers assess whether a company’s reported income is reflective of its true profitability.

In the context of business acquisitions, QoE is the measure that helps potential acquirers assess whether a company's reported income is reflective of its true profitability.

QoE analysis involves examining several key components. 

First, it looks at the sustainability of a company's earnings. It asks the question: Are the company's reported profits likely to continue in the future? 

The next step is to assess the reliability of the earnings. Are they based on hard cash flows, or are they inflated by accounting tricks or one-off events? 

A good QoE report also evaluates the consistency of the company's earnings over time, ensuring that the business has a stable financial base to support future growth.

However, it's critical to remember that while reported earnings are an essential factor to consider, they should not be the only component in your analysis. For example, a company might have potential liabilities, debts, or impending legal issues that aren't reflected in the reported earnings but could significantly affect its future profitability…

How Acquira Approaches QoE

Acquira provides Quality of Earnings (QoE) services specifically tailored for small businesses. We offer a comprehensive suite of services designed to ensure that your potential business acquisition is not just viable, but also profitable.

Here's a brief overview of our services:

  1. Deal Confidence: Acquira investigates the historical and current financials of a business, ensuring that it has a solid financial foundation and sustainable operating metrics that can extend into the future. This service can uncover missed items or incorrect reporting, offering you confidence in your acquisition decision.
  2. Protection: Acquira's team will validate that the business you're considering is a good acquisition target, protecting you from potential investment pitfalls.
  3. Savings: Using our diligence findings, you can potentially reduce the purchase price of the business. This could result in significant savings.
  4. Growth Opportunities Identification: Acquira helps you understand key areas such as segment performance and profit margin drivers to determine growth opportunities and risks. This can be crucial for planning your business's future expansion.
  5. Financial Analysis: Acquira analyzes revenue and ad spending to validate the sustainability of the core financial operations of the business and its profit potential. This analysis provides clarity and allows for informed decision-making.
  6. Future Intent: Acquira doesn't just look at current financials, but also examines future earnings potential. After all, your primary reason for buying a business is its potential for future growth and profitability.
  7. Honesty: The process of buying a business can be overwhelming. Acquira promises to provide an honest opinion of the deal, helping to keep your feet on the ground and your decisions sound.

In essence, Acquira’s QoE services offer a comprehensive analysis of your potential business acquisition, ensuring you are making a well-informed decision.

What Acquira Can Do on QoE Reports

quality of earnings checklist

Acquira’s Quality of Earnings (QoE) services provide vital insights that increase the likelihood of successful acquisitions. Our seasoned team analyzes financial statements of home services businesses, unearthing important details that others might miss.

A central aspect of our services is cash verification. By comparing bank statements with financial statements, we can detect discrepancies or fraud, potentially saving buyers substantially.

Another critical service is the validation of seller-proposed add backs. We meticulously evaluate all add backs, especially those related to personal expenses. Identifying an invalid add back can lower the deal price, saving buyers considerable amounts.

For instance, an invalid $50,000 add back, when factored into the purchase price and multiplied by the deal multiple, could cost the buyer an additional $150,000.

Our team also validates working capital, ensuring brokers have not omitted critical data. This analysis equips buyers with the necessary information to make informed purchase decisions and sidestep post-closure surprises.

Additionally, our QoE services help assess staff efficiency by verifying if increases in headcount lead to higher revenue or productivity, revealing potential red flags.


Who Prepares a Quality of Earnings?

Financial professionals, including accountants, financial analysts, and valuation experts, typically prepare a quality of earnings analysis. The purpose of this analysis is to evaluate the accuracy and sustainability of a company's earnings. It is commonly conducted during financial due diligence or mergers and acquisitions processes.

What Affects Quality of Earnings?

Several factors can affect the quality of earnings, including revenue recognition practices, expense management, accounting policies, changes in market conditions, the timing of transactions, and the overall transparency of financial reporting. These factors influence the accuracy and reliability of a company's reported earnings.

How Long Does Quality of Earnings Take?

The duration of a quality of earnings analysis can vary based on the complexity and size of the business. Typically, the process takes four to six weeks, but the timeline depends on the availability and accessibility of financial information, the thoroughness of the analysis, and the specific requirements of the engagement.

Is a Quality of Earnings Report an Audit?

No, a quality of earnings report is not an audit. Although both involve a comprehensive review of financial information, a quality of earnings analysis is specifically aimed at evaluating the reliability and accuracy of a company's earnings, usually done in the context of mergers and acquisitions. An audit, on the other hand, is a more general examination of financial statements to ensure compliance with accounting standards.


Understanding the Quality of Earnings (QoE) is paramount in business acquisitions. It helps uncover hidden details, validates crucial financial data, and potentially saves buyers from overspending or falling prey to fraudulent activities.

For those considering an acquisition, Acquira's QoE services offer an excellent tool to enhance your decision-making process. These services provide a comprehensive examination of the potential acquisition, beyond surface-level evaluations, and delve into the financial nitty-gritty of the business in question. 

By ensuring that crucial elements such as cash verification, validation of add backs, and working capital checks are handled with diligence and rigor, Acquira makes the complex acquisition journey considerably more navigable.

If you’d like to learn more about Acquira and explore how we can streamline your acquisition endeavors, check out our Quality of Earnings services. Reach out to us for detailed information on how our specialized expertise can assist you in making successful, profitable, and informed acquisition decisions.

Of course, you can't have a Quality of Earnings report without a potential business acquisition. To begin your own business-buying journey, the path starts with Acquira's Accelerator Program. However, space is limited. To see if you're eligible, simply fill out the form below and someone will be in touch.

Key Takeaways

  • Quality of Earnings (QoE) is key in assessing a company's financial sustainability.
  • QoE analysis uncovers real profit drivers beyond basic financial data.
  • Transparent reporting with Acquira prevents business valuation errors.
  • Acquira's QoE services enable informed profitable acquisition decisions.
  • Acquira evaluates present financials and future earning potentials, identifying growth and risks.
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