{"id":1358,"date":"2026-04-29T10:50:08","date_gmt":"2026-04-29T17:50:08","guid":{"rendered":"https:\/\/www.karlongroup.com\/blog\/?p=1358"},"modified":"2026-04-29T10:56:17","modified_gmt":"2026-04-29T17:56:17","slug":"what-is-a-quality-of-earnings-review","status":"publish","type":"post","link":"https:\/\/www.karlongroup.com\/blog\/2026\/04\/29\/what-is-a-quality-of-earnings-review\/","title":{"rendered":"What is a Quality of Earnings Review?"},"content":{"rendered":"\n<p><\/p>\n\n\n\n<p>&#8220;All of my earnings are <em>quality.&#8221;<\/em><\/p>\n\n\n\n<p>Founders going through their first investor diligence process may wonder about the oddly named &#8216;quality of earnings&#8217; review.<\/p>\n\n\n\n<p>If you\u2019re planning to raise capital, sell your company, or even just explore strategic options, there\u2019s a good chance you\u2019ll encounter a Quality of Earnings (QoE) process.<\/p>\n\n\n\n<p>Here\u2019s a clear breakdown of what a QoE process actually isand how Karlon Group helps companies prepare for it.<\/p>\n\n\n\n<hr class=\"wp-block-separator has-alpha-channel-opacity\"\/>\n\n\n\n<h3 class=\"wp-block-heading\"><strong>What Is a Quality of Earnings (QoE)?<\/strong><\/h3>\n\n\n\n<p>A Quality of Earnings report is a financial diligence analysis typically performed by a third-party accounting firm on behalf of a buyer or investor.<\/p>\n\n\n\n<p>Its goal is simple: determine the true, sustainable earnings of a business.<\/p>\n\n\n\n<p>This goes beyond your financial statements. A QoE examines how revenue is generated, how expenses behave, and whether reported EBITDA reflects ongoing operationsor includes one-time, non-recurring, or non-operational items.<\/p>\n\n\n\n<p>At its core, QoE answers three key questions:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Are the company\u2019s earnings accurate?<\/li>\n\n\n\n<li>Are they repeatable and sustainable?<\/li>\n\n\n\n<li>What adjustments are needed to reflect normalized EBITDA?<\/li>\n<\/ul>\n\n\n\n<hr class=\"wp-block-separator has-alpha-channel-opacity\"\/>\n\n\n\n<h3 class=\"wp-block-heading\"><strong>What Does a QoE Analysis Include?<\/strong><\/h3>\n\n\n\n<p>While scope varies by deal, most QoE processes focus on a few critical areas:<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">1. Revenue Quality<\/h3>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Revenue recognition policies and consistency<\/li>\n\n\n\n<li>Customer concentration and churn<\/li>\n\n\n\n<li>Contract terms and pricing dynamics<\/li>\n\n\n\n<li>Cutoff accuracy (timing of revenue)<\/li>\n<\/ul>\n\n\n\n<h3 class=\"wp-block-heading\">2. EBITDA Adjustments<\/h3>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Identification of one-time or non-recurring expenses<\/li>\n\n\n\n<li>Owner-related or discretionary expenses<\/li>\n\n\n\n<li>Non-operating income or costs<\/li>\n\n\n\n<li>Run-rate adjustments (e.g., new hires, pricing changes)<\/li>\n<\/ul>\n\n\n\n<h3 class=\"wp-block-heading\">3. Working Capital Analysis<\/h3>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Normalized working capital requirements<\/li>\n\n\n\n<li>Seasonality and trends<\/li>\n\n\n\n<li>Implications for purchase price adjustments<\/li>\n<\/ul>\n\n\n\n<h3 class=\"wp-block-heading\">4. Accounting &amp; Controls<\/h3>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Strength of financial reporting processes<\/li>\n\n\n\n<li>Consistency in accounting policies<\/li>\n\n\n\n<li>Data reliability and audit readiness<\/li>\n<\/ul>\n\n\n\n<hr class=\"wp-block-separator has-alpha-channel-opacity\"\/>\n\n\n\n<figure class=\"wp-block-gallery has-nested-images columns-default is-cropped wp-block-gallery-1 is-layout-flex wp-block-gallery-is-layout-flex\">\n<figure class=\"wp-block-image size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"683\" data-id=\"1359\" src=\"https:\/\/www.karlongroup.com\/blog\/wp-content\/uploads\/2026\/04\/Quality-of-Earnings-Blog-Post-1024x683.png\" alt=\"\" class=\"wp-image-1359\" srcset=\"https:\/\/www.karlongroup.com\/blog\/wp-content\/uploads\/2026\/04\/Quality-of-Earnings-Blog-Post-1024x683.png 1024w, https:\/\/www.karlongroup.com\/blog\/wp-content\/uploads\/2026\/04\/Quality-of-Earnings-Blog-Post-300x200.png 300w, https:\/\/www.karlongroup.com\/blog\/wp-content\/uploads\/2026\/04\/Quality-of-Earnings-Blog-Post-768x512.png 768w, https:\/\/www.karlongroup.com\/blog\/wp-content\/uploads\/2026\/04\/Quality-of-Earnings-Blog-Post.png 1536w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><\/figure>\n<\/figure>\n\n\n\n<p><\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><strong>Why QoE Matters in a Transaction<\/strong><\/h3>\n\n\n\n<p>QoE isn\u2019t just a box-checking exerciseit directly impacts valuation and deal certainty.<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>Buyers rely on QoE<\/strong> to validate what they\u2019re paying for<\/li>\n\n\n\n<li><strong>Lenders use it<\/strong> to underwrite debt financing<\/li>\n\n\n\n<li><strong>Investors use it<\/strong> to assess risk and upside<\/li>\n<\/ul>\n\n\n\n<p>If issues surface late in the processlike inconsistent revenue recognition or unsupported add-backsbuyers will either:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Retrade the deal (lower price)<\/li>\n\n\n\n<li>Add complexity to terms<\/li>\n\n\n\n<li>Or walk away entirely<\/li>\n<\/ul>\n\n\n\n<p>On the flip side, companies that are well-prepared for QoE tend to:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Move through diligence faster<\/li>\n\n\n\n<li>Maintain credibility with buyers<\/li>\n\n\n\n<li>Command stronger valuations<\/li>\n<\/ul>\n\n\n\n<hr class=\"wp-block-separator has-alpha-channel-opacity\"\/>\n\n\n\n<h3 class=\"wp-block-heading\"><strong>Common Pitfalls Companies Face<\/strong><\/h3>\n\n\n\n<p>Most companies don\u2019t fail QoE because the business is weak. They struggle because the financial story isn\u2019t clearly supported.<\/p>\n\n\n\n<p>Common challenges include:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Revenue data that doesn\u2019t tie cleanly to financial statements<\/li>\n\n\n\n<li>Inconsistent or undocumented EBITDA adjustments<\/li>\n\n\n\n<li>Limited visibility into customer or product-level performance<\/li>\n\n\n\n<li>Manual processes and lack of audit trail<\/li>\n\n\n\n<li>Surprises in working capital trends<\/li>\n<\/ul>\n\n\n\n<p>These issues slow diligence and create doubt, both of which are costly in a transaction environment.<\/p>\n\n\n\n<hr class=\"wp-block-separator has-alpha-channel-opacity\"\/>\n\n\n\n<h3 class=\"wp-block-heading\"><strong>Real-World Examples of QoE Preparation<\/strong><\/h3>\n\n\n\n<h3 class=\"wp-block-heading\"><strong>Hub-and-Spoke Restaurant Chain<\/strong><\/h3>\n\n\n\n<p>We worked with a multi-location restaurant group operating a hub-and-spoke model across several markets. Reported results varied significantly by location due to differences in maturity, demand levels, and ramp timing.<\/p>\n\n\n\n<p>We helped the client build a normalized view of performance by market, presenting what financials would look like at full demand in each operating region. This allowed buyers to clearly understand the steady-state earnings power of the business rather than anchoring on underutilized locations.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><strong>Ecommerce Fulfillment Optimization<\/strong><\/h3>\n\n\n\n<p>For an ecommerce company, reported gross margins were being negatively impacted by fulfillment inefficiencies. Shipping costs were inflated due to inconsistent box selection, lack of rate shopping, and poor adherence to SOPs by the 3PL.<\/p>\n\n\n\n<p>We rebuilt gross margin analysis to reflect what performance would have looked like if outbound shipping had been optimized. This included using the correct packaging, enforcing SOP compliance, and applying rate-shopping assumptions. The result was a more accurate representation of normalized margins and a clearer path to improvement.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><strong>Common EBITDA Addback Examples<\/strong><\/h3>\n\n\n\n<p>In addition to operational normalization, we regularly help clients identify and support appropriate EBITDA adjustments such as:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Excess owner compensation above market rates<\/li>\n\n\n\n<li>One-time legal or professional fees<\/li>\n\n\n\n<li>Non-recurring consulting or project costs<\/li>\n\n\n\n<li>Personal or discretionary expenses run through the business<\/li>\n\n\n\n<li>Hiring gaps where roles are below steady-state needs<\/li>\n\n\n\n<li>Temporary cost spikes or inefficiencies that are not expected to persist<\/li>\n<\/ul>\n\n\n\n<p>The key is not just identifying these adjustments, but documenting and supporting them in a way that stands up under diligence.<\/p>\n\n\n\n<hr class=\"wp-block-separator has-alpha-channel-opacity\"\/>\n\n\n\n<h3 class=\"wp-block-heading\"><strong>How Karlon Group Helps You Prepare<\/strong><\/h3>\n\n\n\n<p>At Karlon Group, we work with companies <em>before<\/em> a QoE beginsso they go into diligence prepared, confident, and in control of the narrative.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><strong>1. Pre-QoE Readiness Assessment<\/strong><\/h3>\n\n\n\n<p>We evaluate your financials through the lens of a diligence provider, identifying gaps in:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Revenue recognition and reporting<\/li>\n\n\n\n<li>EBITDA adjustments and documentation<\/li>\n\n\n\n<li>Data integrity and reconciliation<\/li>\n<\/ul>\n\n\n\n<p>You get a clear roadmap of what needs to be cleaned up before engaging buyers.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><strong>2. EBITDA Normalization &amp; Support<\/strong><\/h3>\n\n\n\n<p>We help build a defensible EBITDA bridge:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Identify appropriate add-backs<\/li>\n\n\n\n<li>Document rationale with supporting evidence<\/li>\n\n\n\n<li>Align adjustments with market expectations<\/li>\n<\/ul>\n\n\n\n<p>This ensures your numbers stand up under scrutiny.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><strong>3. Data Room &amp; Reporting Preparation<\/strong><\/h3>\n\n\n\n<p>We organize the financial story in a way diligence teams expect:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Clean monthly financials with tie-outs<\/li>\n\n\n\n<li>Revenue and customer analyses<\/li>\n\n\n\n<li>Working capital schedules<\/li>\n<\/ul>\n\n\n\n<p>The goal is simple: <strong>no surprises during diligence.<\/strong><\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><strong>4. Ongoing Diligence Support<\/strong><\/h3>\n\n\n\n<p>Once a QoE is underway, we act as your internal partner:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Respond to diligence requests<\/li>\n\n\n\n<li>Bridge gaps between your team and the QoE provider<\/li>\n\n\n\n<li>Help defend your numbers and narrative<\/li>\n<\/ul>\n\n\n\n<hr class=\"wp-block-separator has-alpha-channel-opacity\"\/>\n\n\n\n<h3 class=\"wp-block-heading\"><strong>The Bottom Line<\/strong><\/h3>\n\n\n\n<p>A QoE process is one of the most important and scrutinized steps in any transaction.<\/p>\n\n\n\n<p>You can approach it reactively and hope things hold up under pressure.<\/p>\n\n\n\n<p>Or you can prepare in advance, control the narrative, and position your business for the best possible outcome.<\/p>\n\n\n\n<p>Karlon Group helps you do the latter.<\/p>\n\n\n\n<hr class=\"wp-block-separator has-alpha-channel-opacity\"\/>\n\n\n\n<p>If you\u2019re considering a transaction or want to understand how prepared your company is for a QoE process, get in touch with our team.<\/p>\n\n\n\n<p><\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><strong>About the Author:<\/strong><\/h3>\n\n\n\n<p>Sean Scanlon is co-founder and Managing Partner at&nbsp;<a href=\"https:\/\/www.karlongroup.com\/\">Karlon Group<\/a>, a fractional finance and accounting firm that helps companies build, scale, and optimize their finance and accounting functions. Karlon Group works with companies across SaaS, consumer, manufacturing, and technology, offering a full suite of finance and accounting support tailored to each client\u2019s changing needs.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>&#8220;All of my earnings are quality.&#8221; Founders going through their first investor diligence process may wonder about the oddly named &#8216;quality of earnings&#8217; review. If you\u2019re planning to raise capital, sell your company, or even just explore strategic options, there\u2019s a good chance you\u2019ll encounter a Quality of Earnings (QoE) process. Here\u2019s a clear breakdown [&hellip;]<\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[147,146,113,145,144],"class_list":["post-1358","post","type-post","status-publish","format-standard","hentry","category-uncategorized","tag-adjusted-ebitda","tag-diligence","tag-ebitda","tag-investor-diligence","tag-quality-of-earnings"],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v27.2 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>What is a Quality of Earnings Review? | Karlon Group<\/title>\n<meta name=\"description\" content=\"A blog focused on the most important finance topics for startups &amp; venture capital investors\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.karlongroup.com\/blog\/2026\/04\/29\/what-is-a-quality-of-earnings-review\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"What is a Quality of Earnings Review? | Karlon Group\" \/>\n<meta property=\"og:description\" content=\"A blog focused on the most important finance topics for startups &amp; venture capital investors\" \/>\n<meta property=\"og:url\" content=\"https:\/\/www.karlongroup.com\/blog\/2026\/04\/29\/what-is-a-quality-of-earnings-review\/\" \/>\n<meta property=\"og:site_name\" content=\"Karlon Group\" \/>\n<meta property=\"article:published_time\" content=\"2026-04-29T17:50:08+00:00\" \/>\n<meta property=\"article:modified_time\" content=\"2026-04-29T17:56:17+00:00\" \/>\n<meta property=\"og:image\" content=\"https:\/\/www.karlongroup.com\/blog\/wp-content\/uploads\/2026\/04\/Quality-of-Earnings-Blog-Post.png\" \/>\n\t<meta property=\"og:image:width\" content=\"1536\" \/>\n\t<meta property=\"og:image:height\" content=\"1024\" \/>\n\t<meta property=\"og:image:type\" content=\"image\/png\" \/>\n<meta name=\"author\" content=\"Sean Scanlon\" \/>\n<meta name=\"twitter:card\" content=\"summary_large_image\" \/>\n<meta name=\"twitter:label1\" content=\"Written by\" \/>\n\t<meta name=\"twitter:data1\" content=\"Sean Scanlon\" \/>\n\t<meta name=\"twitter:label2\" content=\"Est. reading time\" \/>\n\t<meta name=\"twitter:data2\" content=\"5 minutes\" \/>\n<script type=\"application\/ld+json\" class=\"yoast-schema-graph\">{\"@context\":\"https:\/\/schema.org\",\"@graph\":[{\"@type\":[\"Article\",\"BlogPosting\"],\"@id\":\"https:\/\/www.karlongroup.com\/blog\/2026\/04\/29\/what-is-a-quality-of-earnings-review\/#article\",\"isPartOf\":{\"@id\":\"https:\/\/www.karlongroup.com\/blog\/2026\/04\/29\/what-is-a-quality-of-earnings-review\/\"},\"author\":{\"name\":\"Sean Scanlon\",\"@id\":\"https:\/\/www.karlongroup.com\/blog\/#\/schema\/person\/1b90fb80ec34cbe8533c47de8558965f\"},\"headline\":\"What is a Quality of Earnings Review?\",\"datePublished\":\"2026-04-29T17:50:08+00:00\",\"dateModified\":\"2026-04-29T17:56:17+00:00\",\"mainEntityOfPage\":{\"@id\":\"https:\/\/www.karlongroup.com\/blog\/2026\/04\/29\/what-is-a-quality-of-earnings-review\/\"},\"wordCount\":1017,\"commentCount\":0,\"publisher\":{\"@id\":\"https:\/\/www.karlongroup.com\/blog\/#organization\"},\"image\":{\"@id\":\"https:\/\/www.karlongroup.com\/blog\/2026\/04\/29\/what-is-a-quality-of-earnings-review\/#primaryimage\"},\"thumbnailUrl\":\"https:\/\/www.karlongroup.com\/blog\/wp-content\/uploads\/2026\/04\/Quality-of-Earnings-Blog-Post-1024x683.png\",\"keywords\":[\"Adjusted EBITDA\",\"diligence\",\"EBITDA\",\"investor diligence\",\"quality of earnings\"],\"inLanguage\":\"en-US\",\"potentialAction\":[{\"@type\":\"CommentAction\",\"name\":\"Comment\",\"target\":[\"https:\/\/www.karlongroup.com\/blog\/2026\/04\/29\/what-is-a-quality-of-earnings-review\/#respond\"]}]},{\"@type\":\"WebPage\",\"@id\":\"https:\/\/www.karlongroup.com\/blog\/2026\/04\/29\/what-is-a-quality-of-earnings-review\/\",\"url\":\"https:\/\/www.karlongroup.com\/blog\/2026\/04\/29\/what-is-a-quality-of-earnings-review\/\",\"name\":\"What is a Quality of Earnings Review? 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