Quality of Earnings (QoE) analysis is the financial examination that every serious acquirer or investor conducts before closing a transaction — and the one that most growth-stage companies are completely unprepared for. A QoE that surfaces unexpected adjustments during due diligence delays deals, reduces valuations, and occasionally kills transactions that should have closed cleanly.
This article explains what a QoE covers, how to build one from QuickBooks Online data, and why preparing for QoE scrutiny before a transaction process starts is one of the most valuable things a fractional CFO can do for a client approaching an exit or funding round.
A QoE is an analysis of the sustainability, repeatability, and accuracy of a company's reported earnings. It answers the question: "Is the EBITDA this company is claiming actually the EBITDA a user is acquiring?" The answer is almost never a simple yes — there are almost always adjustments that move the number in both directions.
QoE is distinct from an audit. An audit confirms that the financial statements are presented in accordance with accounting standards. A QoE goes further, examining whether the economic substance of the earnings is what the income statement suggests — regardless of whether the accounting is technically correct.
The most common QoE adjustment. These are revenue or expense items that will not repeat in the hands of a user. Examples of non-recurring expenses that users add back: one-time legal settlements, severance payments, costs related to the transaction itself, owner compensation above market rate (for owner-operated businesses), and large one-time professional fees. Examples of non-recurring revenue that users remove: one-time project fees with non-recurring customers, government grants that won't continue, and revenue from contracts not being transferred in the transaction.
The discipline is in documentation. Every add-back must be supported with evidence — an invoice, a legal agreement, a board resolution — and a clear argument for why it will not recur. Users and their advisors will challenge every add-back aggressively.
QuickBooks Online companies that haven't maintained tight revenue recognition practices are particularly vulnerable here. If a company has been recognizing subscription revenue on receipt rather than on delivery, the trailing 12-month revenue may include cash collected for services not yet delivered. Users normalize this to proper accrual recognition, which can reduce the reported revenue and EBITDA base. Conversely, companies that have been conservative on recognition (deferring revenue that should have been recognized) may have QoE adjustments that increase earnings — a rarer but not uncommon situation.
For owner-operated businesses, the owner's compensation is often set at a non-market rate — either below market (adding back to EBITDA) or above market (reducing EBITDA). Users normalize owner compensation to what they would pay a market-rate replacement executive for the same role. If the owner is paying themselves $180K and a market-rate CFO would cost $250K, the normalized EBITDA is $70K lower than reported. If they are paying themselves $500K and a market CEO would cost $320K, the normalized EBITDA is $180K higher.
A QoE always includes a working capital analysis. The question is: what is the "normal" level of working capital required to run the business, and is the working capital at close above or below that level? If the seller has been drawing down AR collections aggressively before close (boosting cash at the expense of future collections), the user will include a working capital peg in the purchase agreement that adjusts the price for deviations from the target.
The working capital trap: Many sellers focus entirely on EBITDA and assume the balance sheet takes care of itself. The working capital peg in the purchase agreement can move the net proceeds by $500K–$2M+ on a mid-market transaction. This is entirely avoidable with 6–12 months of preparation.
Related-party transactions — arrangements between the company and entities controlled by the owner — are scrutinized heavily in QoE. Common examples: rent paid to a property entity owned by the same family (is it at market rate?), management fees paid to a holding company (does the holding company provide real services?), services purchased from a related vendor at above-market rates. Each of these is a potential QoE adjustment, either adding back overpayments or normalizing below-market arrangements to market rates.
The goal of QoE preparation is to remove surprises from the due diligence process by identifying adjustments proactively, documenting them with proper support, and presenting a normalized EBITDA that users and their advisors will find credible and well-supported.
QoE is typically built on a trailing 12-month view, updated to the most recent completed month. This requires having clean, accrual-adjusted monthly financials for the past 12 months. If monthly closes have been inconsistent — some months have depreciation posted, some don't; some months have deferred revenue recognized, some don't — the TTM P&L will have timing noise that obscures the real run-rate economics.
Before starting any QoE preparation, a fractional CFO should normalize the trailing 12 months so that every month has consistently applied accrual schedules, consistent revenue recognition, and consistent intercompany treatment.
Present the path from reported net income to management-adjusted EBITDA in a clear bridge: Net income → interest → taxes → D&A → reported EBITDA → add-back 1 (with documentation reference) → add-back 2 → removal 1 → management-adjusted EBITDA. This format signals sophistication and makes the user's QoE work easier — which reduces friction in the process.
Users want to understand the revenue composition: what percentage is recurring vs non-recurring, what is the revenue concentration by customer, what are the contract terms and renewal rates, and what is the churn pattern. A revenue quality analysis that you prepare yourself, with the underlying data, is more credible than one a user reconstructs from scratch. It also lets you frame the story on your terms rather than theirs.
The right answer is 12–18 months before a transaction. That window allows time to address accounting practices that would create QoE adjustments (tightening revenue recognition, formalizing related-party arrangements, normalizing owner compensation), to build a clean 12-month history with consistent monthly closes, and to prepare the documentation before a compressed deal timeline makes it impossible.
Fractional CFOs who help clients prepare for QoE scrutiny before entering a process deliver measurably higher proceeds than those who only engage once the process has started. The preparation is not just financial housekeeping — it is value creation.
Fynease Intelligence turns clean, close-processed financials into CFO-grade reporting — variance analysis, KPI dashboards, quality of earnings, forecasting, and board packs. Per client, for fractional CFOs managing QuickBooks Online companies.
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