Quality of Earnings (QoE)
Quality of Earnings is the diligence workstream that adjusts reported financial statements to produce a defensible 'normalized' or 'adjusted' EBITDA: stripping out one-time gains, owner-related compensation, deferred-revenue acceleration, capitalized R&D treatment, and other accounting choices that inflate the headline number. QoE is the single biggest gap between LOI and closing on tech middle-market deals — typical QoE adjustments compress headline EBITDA by 5–25%, with revenue recognition issues alone evaporating ~30% of deal value in problem cases. Sellers who run their own QoE pre-LOI keep more of the multiple than sellers who let the buyer find the issues first.
In our Transaction Advisory engagements, the QoE adjustments that most reliably move the multiple are: (1) revenue recognition timing on multi-element arrangements, (2) capitalized vs. expensed R&D for software developed for internal use, (3) deferred-revenue acceleration on annual prepays, and (4) owner-related compensation add-backs. The first three are accounting; the fourth is governance. Buyers reject most fourth-category add-backs at LOI, which surprises sellers who expect them to clear.
For an operator preparing for sale: pre-LOI QoE is two months of work that protects two-to-five turns of multiple compression at closing. The math is consistent enough that we treat it as table stakes for any engagement above $30M EV.
Related terms
- EBITDA — Earnings Before Interest, Taxes, Depreciation, and Amortization. The proxy for operating cash flow that PE buyers use to set valuation multiples.
- Net Revenue Retention (NRR) — The percentage of recurring revenue retained from existing customers a year later, including expansion, after subtracting churn and contraction. The single most-watched B2B SaaS valuation metric.
Where this gets applied
- Financial Infrastructure — ARR waterfalls, deferred-revenue rules, board-pack standardization, FP&A architecture.
- Exit Readiness — Pre-LOI cleanup. Financial reporting normalization, contract hygiene, IP assignment review, customer-concentration mitigation.