What is a quality of earnings report, and how does it treat one-time income?
A quality of earnings (QoE) report is a diligence analysis, usually prepared by an accounting or transaction advisory firm, that tests whether a company's reported earnings are accurate and repeatable. It bridges reported EBITDA to adjusted EBITDA, so one-time proceeds, such as a payment for licensing a records snapshot, are normally separated from run-rate earnings.
What a quality of earnings report is
A quality of earnings (QoE) report is a financial diligence analysis that tests whether a company's reported earnings, usually EBITDA, are accurate and likely to recur. An accounting or transaction advisory firm prepares it for a seller, a buyer or a lender ahead of a sale or financing.
The report starts from the financial statements and builds a bridge to adjusted EBITDA, showing each adjustment and the evidence behind it. Buyers use it to set price and the working capital target; lenders use it to size debt. A sell-side QoE is a staple of exit readiness for owners planning a process.
Sell-side vs buy-side QoE
| Sell-side QoE | Buy-side QoE | |
|---|---|---|
| Commissioned by | The company or its owners, before marketing | A prospective buyer, usually after an LOI |
| Purpose | Find issues early, support the asking price, shorten diligence | Test the seller's numbers before closing |
| Shared with | Bidders and lenders, usually under a release letter | The buyer, its lenders and investment committee |
| Timing | Before the marketing book goes out | During confirmatory diligence |
The sell-side report often feeds the financial summary in the confidential information memorandum.
What does a QoE examine?
- Revenue quality: recurring versus project or one-time revenue, customer concentration and churn.
- EBITDA adjustments: owner compensation, related-party costs, one-time legal or restructuring costs, and out-of-period items.
- Net working capital: a normalized level that becomes the peg in the purchase agreement.
- Debt and debt-like items: deferred revenue, accrued bonuses, unpaid taxes and similar claims on value.
- Proof of cash: whether recorded revenue ties to bank deposits.
QoE vs audit
| Dimension | Financial statement audit | Quality of earnings report |
|---|---|---|
| Question answered | Are the statements fairly presented under the accounting framework? | Are earnings real, sustainable and repeatable? |
| Output | An audit opinion | Adjusted EBITDA, working capital analysis and findings, with no audit opinion |
| Period | A fiscal year | Recent years, the trailing twelve months and monthly trends |
| Main users | Lenders, owners, regulators | Buyers, sellers and lenders in a transaction |
| Focus | Compliance with the framework | Run-rate earnings for valuation |
A QoE does not replace an audit, and an audit does not answer the QoE question. For a company whose statements are reviewed or compiled rather than audited, the QoE may be the most detailed outside look at its numbers that a buyer gets.
How diligence providers treat one-time data-license proceeds
A one-time payment for licensing a snapshot of operational records is normally treated as non-recurring. Expect the provider to remove it from adjusted EBITDA, or show it on its own line, rather than count it in run-rate earnings.
Timing can shift too. Under ASC 606, a license of intellectual property is either a right to use the IP as it exists when granted, recognized at a point in time, or a right to access it over the license period, recognized over time, as Deloitte's ASC 606 licensing roadmap explains. FASB clarified that guidance in ASU 2016-10. How a given data license is classified is a question for the company's auditors, not for the advisor or a referral partner.
Advisors can keep a license from clouding the numbers:
| Item | How a QoE usually presents it | What to prepare |
|---|---|---|
| License payment | Non-recurring income, outside adjusted EBITDA | The signed agreement and invoice |
| Preparation costs | One-time cost linked to the license | Staff hours and vendor invoices for data preparation |
| Exclusivity term | Disclosure item rather than an adjustment | Term, scope and limits on the same data |
| Payment timing | Cash and working capital effect | Invoice date and receipt date |
In a SourceX deal the company receives one all-in price, with SourceX's fee included and no separate charges, paid once, typically within about 60 days of invoicing after the buyer selects the data. That makes the item easy to isolate on one line. Any partner reward is a share of SourceX's fee, so it is never deducted from what the company receives and does not appear as a company cost.
Who owns QoE workpapers, and can that data be reused?
Workpapers generally stay with the firm that prepared them, and third-party access is governed by the engagement letter and any release or reliance letters. Diligence files are not a licensing asset: a data license covers the company's own operational records, inventoried separately by the company, and partners never forward diligence materials or data room contents.
This is general information, not legal, tax or financial advice. Confirm accounting treatment with the company's auditors and deal counsel.
Next step
If a sell-side client holds years of rights-clear records, compare it with the who qualifies baseline and see how the reward formula works in the referral earnings calculator. The page for M&A advisors covers timing a license around a sale. Then register as a partner and make the introduction.
- Step 1Share your linkSend your personal link to a company you know.
- Step 2Company appliesThe company applies itself at /apply.
- Step 3Buyer selects and paysThe buyer selects and pays for the data and SourceX receives its fee.
- Step 4You get your rewardYour share of SourceX fees becomes payable.
Common questions
How long does a quality of earnings report take?
Timing depends on the size of the business, the state of its books and how quickly management answers requests. Clean monthly closes, reconciled balance sheets and an organized data room shorten the work; restated periods, cash-basis records or missing support lengthen it. Ask the provider for a timeline tied to its document request list before engaging.
Is a sell-side QoE worth it for a lower-middle-market company?
Often, when the company expects several bidders or has adjustments that need support, such as owner compensation, a recent acquisition or one-time costs. A sell-side report surfaces issues before buyers find them and can shorten buy-side diligence. It does not stop buyers from commissioning their own work, so weigh the cost against the expected benefit with your advisor.
Will a buyer apply a multiple to data-license income?
Generally not, because a one-time license payment is not run-rate earnings. Buyers usually treat it as non-recurring and value it, if at all, as a one-off cash item or as evidence that the records are a licensable asset. Present it on a separate line rather than blending it into adjusted EBITDA, which invites a credibility discount.
Does a QoE look at a company's data assets?
Not directly. A QoE focuses on earnings, working capital and debt-like items. Data assets appear only where they touch the numbers, such as license income, deferred revenue or preparation costs, or where IT and legal diligence flag them. Record depth and data rights are better described in the marketing book and in the data room.
Who pays for the quality of earnings report?
The party that commissions it. Sellers pay for a sell-side report and buyers pay for their own buy-side work, although purchase negotiations sometimes shift costs. Lenders may rely on the buyer's report through a reliance letter instead of ordering a separate one. The engagement letter sets who may use the findings and on what terms.
Related pages
Free resources
- Profit margin calculator — Profit and margin across three scenarios.
- Client opportunity brief generator — An editable intro email, summary and checklist.
- Days sales outstanding calculator — How many days customers take to pay.
- All free tools · MCP resource center
By SourceX Partnerships Team · Published 2026-10-09 · Updated 2026-10-09
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