Quality of Earnings (QofE) vs Audit — When You Need Each
Buyers want QofE. Sellers think an audit covers it. They don't do the same job.
The bottom line
Audited financials prove the historical P&L follows GAAP. QofE proves that EBITDA is what the seller claims it is — normalized for owner items, one-time events, working-capital quirks, and accounting choices. Buyers will require QofE even if you have audited financials. Plan for QofE to take your claimed EBITDA down 10-25% — that's normal, not a sign anything's wrong. Sell-side QofE (you commission your own) is now standard at $5M+ deals because it lets you control the narrative.
Side-by-side comparison
| Aspect | Quality of Earnings (QofE) | Financial Audit |
|---|---|---|
| What it answers | What's the REAL EBITDA after stripping out owner items, non-recurring events, and accounting choices? | Do the financial statements present fairly per GAAP? |
| Who commissions it | Buyer (always) — sometimes seller commissions sell-side QofE to control the narrative | Seller (annually for some businesses; required for SBA loans over $5M) |
| Typical cost | $25K-$75K for SMB; $75K-$200K for mid-market | $15K-$50K for SMB review; $50K-$200K full audit |
| Timing | 4-8 weeks during diligence | Annual; takes 2-4 weeks once year-end books close |
| What it scrutinizes that audits don't | Owner add-backs, related-party transactions, working-capital seasonality, customer concentration impact, contract revenue recognition assumptions, deferred-revenue policies | Same scrutiny but only for GAAP compliance, not for normalized-EBITDA narrative |
| Typical EBITDA adjustment | 10-25% downward from seller's claim is normal; 25%+ is a red flag for buyer | Audited EBITDA may differ from book EBITDA but the gap is GAAP-driven, not 'add-back-driven' |
| Does QofE replace an audit? | Not for SBA / debt purposes. QofE is for the deal; audit is for the business. | Not for the buyer's deal underwriting — buyers want both ideally |
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Based on standard M&A practice and 4 years of healthcare-services M&A advisory experience. Edge cases vary by deal - not legal or tax advice. Methodology