Home Services M&A Trends 2025: What Buyers Are Doing Right Now
PE consolidation, rising multiples in recurring-revenue verticals, and the buyers who are most active right now. A market-level view of home service M&A.
Read Article →Due DiligenceFebruary 2025 · 6 min read
What Is a Quality of Earnings Report — And Do You Need One?
PE buyers always request a QoE. Individual buyers sometimes do. Here's what a Quality of Earnings report is, what it covers, and how to prepare for it.
JT
Jason Taken
HedgeStone Business Advisors
A Quality of Earnings (QoE) report is an independent financial analysis performed by a third-party accounting firm on behalf of the buyer. It's standard in PE transactions and increasingly common in larger individual buyer deals. Understanding what QoE covers — and preparing for it — prevents deal-killing surprises.
What a QoE Report Covers
A QoE report examines: (1) Revenue quality — are the revenues real, recurring, and properly recognized? (2) EBITDA normalization — are the add-backs legitimate and documentable? (3) Working capital — is the working capital normalized appropriately for closing? (4) Customer concentration — what's the risk of revenue loss from top customers? (5) One-time items — what non-recurring items are in the financials? (6) Net debt — what debt and debt-like items will be deducted at closing?
When Do You Need to Worry About QoE?
PE buyers almost always commission a QoE report. Individual buyers with sophisticated advisors may request one for deals over $1M. As a seller, you don't commission the QoE (the buyer does), but your financials need to withstand it. The QoE firm will ask for detailed transaction-level data — not just summary P&Ls. If your books aren't clean, a QoE will surface the issues and buyers will re-trade (lower the price).
How to Prepare for a QoE
Pre-sale preparation: get your books to accrual-basis, reconcile tax returns to P&L statements, document every add-back with backup, clean up any personal expenses in the business, and work with an M&A-experienced CPA to identify issues before the QoE firm does. Some sellers commission a 'sell-side QoE' — a self-commissioned report that surfaces issues before going to market. For businesses over $5M in value, this is often worth the $15K–$30K cost.
Frequently Asked Questions
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