In today’s competitive mergers and acquisitions market, buyers and investors are digging deeper than ever into a company’s financial health. One of the most critical steps in the due diligence process is the Quality of Earnings (QoE) report. Whether your company is preparing for a sale, recapitalization, private equity investment, or strategic acquisition, your finance team must be ready to support a smooth and successful QoE process.
A well-prepared finance department can reduce delays, improve credibility with investors, and maximize company valuation. Here’s how to prepare your finance team for a Quality of Earnings review and why having the right accounting talent in place matters.
What Is a Quality of Earnings (QoE) Report?
A Quality of Earnings report evaluates the sustainability, accuracy, and reliability of a company’s earnings. Unlike standard financial statements, a QoE analysis focuses on identifying normalized EBITDA, recurring revenue trends, working capital considerations, and potential financial risks.
Typically conducted by third-party accounting firms during M&A due diligence, QoE reports help buyers determine whether a company’s earnings are truly representative of future performance.
Common QoE Areas Reviewed:
- Revenue recognition practices
- EBITDA adjustments
- Customer concentration
- One-time expenses
- Working capital trends
- Internal controls
- Financial reporting accuracy
- Cash flow consistency
1. Organize Financial Documentation Early
One of the biggest mistakes companies make is waiting until the transaction process begins to gather financial records. Your finance team should proactively organize key documents months before any formal due diligence begins.
Important Documents to Prepare:
- Monthly and annual financial statements
- General ledger detail
- Bank reconciliations
- Revenue schedules
- AR/AP aging reports
- Payroll records
- Forecasts and budgets
- Tax filings
- Customer and vendor contracts
Having clean, accessible financial data demonstrates operational maturity and builds trust with investors.
2. Strengthen Internal Controls and Reporting Processes
QoE providers often identify weaknesses in internal controls that may create concerns for buyers. Finance leaders should review accounting workflows and reporting procedures to ensure consistency and transparency.
Focus on:
- Accurate month-end close processes
- Segregation of duties
- Consistent revenue recognition
- Proper expense classification
- Documented accounting policies
Companies with strong internal accounting controls often experience faster diligence timelines and fewer valuation challenges.
3. Normalize EBITDA Before the Review
One of the core components of a QoE analysis is adjusted EBITDA. Your finance team should identify non-recurring, discretionary, or unusual expenses ahead of time.
Examples include:
- Owner-related expenses
- One-time legal fees
- Non-recurring bonuses
- Pandemic-related costs
- Relocation expenses
Preparing these adjustments in advance helps avoid confusion during diligence and positions the company more favorably.
4. Ensure Accurate Revenue Recognition
Revenue quality is one of the most scrutinized areas during a Quality of Earnings review. Buyers want confidence that revenue is sustainable, recurring, and properly recognized.
Your accounting team should:
- Review of revenue recognition policies
- Validate deferred revenue schedules
- Reconcile sales data across systems
- Identify any unusual spikes or inconsistencies
If your organization operates on subscriptions, contracts, or milestone billing, accurate revenue reporting becomes even more important.
5. Evaluate Your Finance Team’s Bandwidth
QoE preparation places significant pressure on accounting and finance teams. Many organizations underestimate the amount of work involved in supporting diligence requests while maintaining day-to-day operations.
This is where staffing challenges often arise:
- Delayed reporting
- Burnout among accounting staff
- Incomplete documentation
- Slower response times to investors
Companies preparing for a transaction should evaluate whether they have enough experienced accounting professionals to handle the workload effectively.
6. Bring in Specialized Accounting Talent When Needed
Many businesses turn to contract or interim accounting professionals during transaction preparation. Experienced finance talent can help manage reporting, cleanup projects, reconciliations, and investor requests without disrupting normal operations.
Hiring professionals with experience in:
- M&A accounting
- Financial due diligence
- Technical accounting
- SEC reporting
- FP&A
- Private equity-backed environments
This can dramatically improve the efficiency of the QoE process.
Why Preparation Matters
A poorly prepared finance team can create red flags that negatively impact valuation, delay closing timelines, or even jeopardize a transaction altogether. On the other hand, companies with organized financial reporting and strong accounting leadership often experience smoother diligence processes and stronger buyer confidence.
Preparing early gives your organization time to address potential issues before investors uncover them themselves.
Partner with RWR’s Accounting Recruiting Experts
If your company is preparing for a Quality of Earnings review, having the right accounting and finance professionals in place is critical. At RWR, we specialize in connecting organizations with top-tier accounting and finance talent who can support M&A readiness, due diligence, and financial reporting initiatives.
Whether you need interim accounting support, a technical accounting expert, or a long-term finance leader, our accounting recruiting team can help you build the right team for a successful transaction.
Contact RWR today to learn how our accounting recruiting specialists can help your finance team prepare for a successful Quality of Earnings process.
