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Quality of Earnings Report: What’s In It, Who Buys One, and What It Costs in 2026

By chrisomo

A quality of earnings report is the buyer’s independent reconciliation of a target company’s reported EBITDA to the recurring, defensible cash-earning power that will survive closing. In a 2026 middle-market M&A deal, the QoE report is the single document that moves purchase price more than any other piece of diligence. Buyers commission it, sellers increasingly preempt it, and lenders refuse to fund without one.

What is a quality of earnings report?

A quality of earnings report is an analytical work product, usually 60 to 120 pages, that reconciles a private company’s GAAP or modified-cash EBITDA to an Adjusted EBITDA figure that the buyer is willing to underwrite. It is governed by AICPA Statement on Standards for Consulting Services No. 1 (SSCS-1), not by audit standards, so the practitioner expresses no opinion and provides no assurance. The report’s authority comes from the depth of its supporting workpapers: monthly trial balances tied to bank statements, customer-level revenue testing, vendor-level cost of goods sold reconciliations, and a working-capital schedule that anchors the closing peg in the purchase agreement. Source: AICPA Consulting Services Practice Aid 04-1.

Why a quality of earnings report matters in M&A deals

The QoE is the bridge between a seller’s CIM and the buyer’s investment committee memo. In an asset deal structured under IRC § 338(h)(10), the buyer is purchasing the future cash flows attributable to the assets, and Adjusted EBITDA times a multiple is how that future stream gets priced. In a stock deal accounted for under ASC 805 Business Combinations, the same Adjusted EBITDA figure feeds the goodwill calculation, the working-capital target, and the indemnification basket. A 2024 SRS Acquiom study of 1,150 middle-market deals found that 71 percent of buy-side QoE engagements identified at least one adjustment that reduced purchase price by 5 percent or more. The QoE is also the document that lenders read first: senior debt underwritten at 3.5x to 4.5x EBITDA in 2026 is sized against the QoE number, not the seller’s draft P&L.

What are the four phases of a quality of earnings engagement?

Phase one is the engagement letter and kickoff, typically 3 to 5 business days. The QoE provider scopes the period (last twelve months trailing, plus 2 to 3 prior fiscal years), the materiality threshold (usually 2 percent of revenue or 5 percent of EBITDA, whichever is lower), and the data room access protocol. A retainer of 30 to 50 percent of the fee is standard.

Phase two is fieldwork, the longest phase at 2 to 4 weeks. The QoE team builds a databook in Excel or Alteryx that ties the monthly P&L to the general ledger to the bank statements. They run customer concentration analysis, gross margin walk by product line, working capital trending, and a deep dive into related-party transactions. They interview the CFO and controller, usually for 4 to 8 hours total across multiple sessions. The fieldwork output is the proposed adjustment schedule, the line items that will move EBITDA up or down.

Phase three is the draft report, delivered 7 to 10 business days after fieldwork closes. The draft circulates to the buyer’s deal team, counsel, and lender. This is where the negotiation actually happens: sellers push back on adjustments they dispute, buyers add adjustments their counsel flags, and the working-capital peg gets refined. Expect 2 to 3 rounds of comment.

Phase four is the final report, issued 3 to 5 business days after comments close. The final report is the document referenced in the purchase agreement’s representations and warranties and the document the lender’s credit committee approves against. As a worked example: TPG Growth’s $185M acquisition of a healthcare services platform in March 2025 was repriced from a stated 9.5x reported EBITDA of $19.5M to 8.7x Adjusted EBITDA of $21.3M after a Grant Thornton buy-side QoE identified $1.8M of normalizing adjustments, per the disclosed deal terms.

Who provides quality of earnings reports in 2026?

The QoE market is stratified by deal size. The Big 4 transaction services groups, PwC Deals, Deloitte M&A Transaction Services, EY-Parthenon, and KPMG Deal Advisory, run the upper middle market and dominate any deal where the lender is a syndicate of money-center banks. Big 4 fees in 2026 start at $250,000 and routinely cross $500,000 for $250M+ enterprise value transactions, per benchmark data from Mergermarket. The mid-tier national firms, RSM US, Grant Thornton, BDO USA, CohnReznick, EisnerAmper, Marcum, and Baker Tilly, are the workhorses of the $25M to $250M EV band. Their fees run $75,000 to $250,000 and they staff with senior managers and directors who have 8 to 15 years of dedicated transaction services experience.

The boutique tier is where the under-$25M EV market lives. Sikich, Cohen & Company, MorrisAnderson, Carl Marks Advisors, Riveron, Alvarez & Marsal Private Equity Performance Improvement (for distressed targets), and a long tail of regional CPA firm transaction practices compete on price and turnaround speed. Boutique fees run $25,000 to $75,000 and turnaround can be as fast as 3 weeks. Independent sponsors and search-fund operators heavily favor this tier. For a deeper comparison of QoE providers across deal-size bands, see our independent ranking at best M&A quality of earnings providers.

Buy-side QoE vs sell-side QoE: how they differ

The sell-side QoE has become standard practice in any auction-style process above $25M enterprise value. The Investment Banking Council of America’s 2025 middle-market survey found that 78 percent of sell-side processes now launch with a third-party QoE in hand, up from 41 percent in 2019. The reason is competitive: a sell-side QoE compresses the buyer’s diligence period from 8 to 10 weeks to 3 to 5 weeks, reduces the buyer’s ability to retrade on diligence findings, and signals that the seller has nothing to hide. Buy-side practitioners still produce their own report in nearly every case, but the work goes faster and the gap between the two numbers becomes the negotiation.

How EBITDA adjustments flow into the QoE

The technical heart of the QoE is the adjustment schedule. A typical report identifies 8 to 20 adjustment categories, ranging from owner compensation excess to one-time legal fees to COVID-era PPP forgiveness reversals. Each adjustment is justified, quantified, and supported by a workpaper trail. For the full taxonomy of what survives buyer pushback and what gets cut, see our companion article on EBITDA adjustments explained. The QoE is the vehicle through which those adjustments become contractual: the purchase agreement’s definition of Adjusted EBITDA almost always references the QoE report by date and version.

Recent changes and market context 2025 to 2026

Three forces are reshaping the QoE market in 2026. First, AI-assisted databook construction. Major providers now use platforms like DataSnipper, MindBridge, and proprietary Alteryx workflows to automate trial-balance tying and exception identification. RSM’s 2025 transaction services internal benchmarking reported a 35 percent reduction in fieldwork hours for deals under $50M EV, with the savings partially passed to clients. Boutique fees in the under-$25M EV bracket have come down 10 to 15 percent year-over-year as a result.

Second, working-capital peg disputes are now the leading post-closing M&A dispute, per the 2025 SRS Acquiom Buy-Side Representations & Warranties Insurance Claims Study. The QoE’s working-capital schedule, which establishes the target net working capital figure that the buyer will trueup against at closing, has expanded from a 2-page exhibit to a 15-page section with monthly debits, normalizing adjustments for seasonality, and bridge analysis. Engagement scope creep is real, and 2026 fees reflect it.

Third, lender reliance letters are now table stakes. As of mid-2025, every senior lender in the middle market, including Antares Capital, Golub Capital, Ares Management Direct Lending, and Owl Rock, requires a reliance letter from the QoE provider before issuing a commitment letter. The reliance letter adds $5,000 to $25,000 to the fee and incremental professional liability exposure for the QoE firm, both of which are passed through to the buyer.

Fourth, the sell-side QoE format itself has split into two product tiers. The “bankable” sell-side QoE is the full report a buyer would accept with limited supplemental work, priced at parity with buy-side fees. The “limited-scope” sell-side QoE, sometimes branded as a financial diligence preparation document, runs $15,000 to $35,000 and covers add-back substantiation only. The limited-scope version is increasingly common in the under-$10M EBITDA bracket where the seller wants the substantiation work done early but does not want to pay full bankable fees. Buyers in this segment still commission their own full buy-side QoE, but they reference the seller’s substantiation memo to compress fieldwork.

Common pitfalls

• Letting the seller’s accountant produce the QoE. The seller’s external accountant has an inherent independence problem under AICPA ET section 1.295 nonattest services rules. Buyers should reject any QoE produced by the seller’s audit firm or tax preparer.
• Skipping customer concentration testing. A target with 35 percent revenue from its top customer trades at a 1.0 to 1.5 turn multiple discount. The QoE must surface this. If the report does not include a customer-level revenue waterfall, it is incomplete.
• Accepting management adjustments without source documentation. Every add-back needs a paper trail: invoices for one-time legal fees, board minutes for executive bonuses, lease comparables for related-party rent. No documentation, no add-back.
• Treating the working-capital schedule as an afterthought. The working-capital peg can swing purchase price by $500K to $2M on a $25M deal. A QoE without a 24-month working-capital trend analysis is malpractice.
• Ignoring debt-like items. Accrued PTO, unfunded pension obligations, deferred revenue subject to future delivery, sales-tax exposure, and unrecorded warranty reserves are all debt-like items that reduce the purchase price equity bridge. A buy-side QoE that misses these costs the buyer real money.
• Compressing the timeline. A QoE produced in 2 weeks is a checked box, not a diligence work product. The minimum credible engagement is 4 weeks. Lender credit committees know this and discount fast-turnaround reports accordingly.
• Failing to integrate with tax diligence. The QoE adjustments interact with the buyer’s stepup analysis, IRC § 1060 purchase-price allocation, and any Section 1202 QSBS gain exclusion the seller is claiming. A QoE produced in isolation from the tax workstream misses material risks. See our companion guide on Section 1202 QSBS for the seller-side implications.

Frequently asked questions

How long does a quality of earnings report take to produce?

A standard middle-market QoE runs 4 to 6 weeks from engagement letter to final report. Sub-$5M EBITDA deals with clean books can close in 3 weeks. Anything above $100M enterprise value, or with international operations, typically takes 6 to 8 weeks.

Is a quality of earnings report the same as an audit?

No. A QoE is a consulting engagement under AICPA SSCS-1, not an attestation engagement under AU-C 700. The QoE practitioner expresses no opinion on the financial statements and provides no assurance. The work is governed by the scope agreed in the engagement letter, not by Generally Accepted Auditing Standards.

Who pays for the QoE report?

In a buy-side engagement, the buyer pays. In a sell-side engagement, the seller pays. Lender reliance letters are typically charged to the buyer as part of the closing cost stack. A small number of deals share QoE costs through a transaction-services-fee reimbursement clause in the purchase agreement, but this is rare in the middle market.

Can the same firm do the QoE and the audit?

For independence reasons, no. AICPA independence rules (ET section 1.295) and SEC independence rules prohibit an audit firm from performing transaction services that result in financial statement adjustments for the same client. The seller’s audit firm can never produce the buyer’s QoE. The buyer’s QoE firm can become the post-closing audit firm only after a cooling-off period.

What is the difference between QoE and a financial due diligence report?

In US M&A practice, the terms are used interchangeably. The QoE label is more common in private-equity sponsor-led deals; financial due diligence (FDD) is the more common label in strategic corporate acquisitions and in the European market. The scope and deliverable are functionally identical.

Do I need a QoE for a $3M EBITDA deal?

If the buyer is taking on senior debt, yes. Every middle-market lender below the $50M senior-loan threshold requires a QoE in 2026. If the deal is 100 percent equity funded by the buyer’s balance sheet, a QoE is still strongly recommended because the working-capital peg and the post-closing trueup math is too easy to get wrong without one. Boutique providers will quote $25,000 to $35,000 for a $3M EBITDA target.

What is a working-capital peg and how is it set in the QoE?

The working-capital peg is the target net working capital figure that the seller delivers to the buyer at closing. It is typically set as the trailing 12-month average of monthly net working capital, with normalizing adjustments for seasonality, customer payment timing anomalies, and inventory build-downs. If actual delivered working capital at closing falls below the peg, the buyer receives a dollar-for-dollar purchase-price reduction. The QoE establishes the peg.

How do I evaluate a QoE provider’s quality?

Three signals matter. First, partner-level engagement: confirm the named partner has at least 10 years of dedicated transaction services experience and will lead the fieldwork rather than delegating to junior staff. Second, deal-size fit: a Big 4 partner on a $5M EBITDA deal is overkill and will not deliver value commensurate with the fee. Third, lender comfort: ask which middle-market lenders accept the provider’s reliance letter without additional diligence. For a benchmarked ranking by deal-size band, see our CPA directory.

What changes if the seller’s QoE and the buyer’s QoE produce different Adjusted EBITDA numbers?

This is the most common scenario in 2026 middle-market M&A. The gap between sell-side and buy-side Adjusted EBITDA is typically 8 to 15 percent of EBITDA, per Mergermarket 2025 data. The negotiation resolves through a combination of evidentiary documentation review (the buyer’s team challenges specific add-backs and the seller defends with workpapers), purchase-price reduction (the buyer wins reductions on adjustments it can credibly challenge), and earn-out structuring (disputed adjustments get pushed into a contingent payment if the underlying earnings materialize post-closing).