Quality of Earnings (QoE)
Definition
An in-depth review, usually done by accountants during the sale of a business, that tests whether reported earnings are accurate, sustainable and properly adjusted.
Want a deeper explanation?
A QoE is where messy books cost the most money, because every dollar of earnings removed is multiplied by the sale price multiple.
Sellers sometimes commission their own QoE before going to market. Watch for: inventory, revenue recognition and owner expenses, which are the most common areas where e-commerce earnings get cut.
Example
A buyer's QoE review finds $40,000 of inventory that should have been written off and rejects $25,000 of add-backs, lowering adjusted EBITDA from $900,000 to $835,000.