due-diligence
A quality of earnings analysis rebuilds reported profit into a sustainable, deal-basis earnings figure. It identifies adjustments, accounting policies and cash conversion so buyers are not paying a multiple of a number that will not repeat.
Quality of earnings is the discipline of asking whether profit is repeatable, cash-backed and measured on policies a new owner would keep. Accounting research has treated “earnings quality” as persistence, accruals and the mapping from earnings to cash. In transactions, the same idea becomes a deliverable: a QoE report with an adjusted EBITDA (or EBIT) bridge.
A QoE is usually the centrepiece of financial due diligence. It is not a substitute for an audit, and it is not a business valuation. It is the earnings input those other processes will use.
Revenue recognition versus IFRS 15 or local GAAP, cut-off, customer concentration, gross-margin mix, run-rate cost, owner compensation, related-party charges, capitalisation policy, one-offs that are not one-off, and the conversion of EBITDA into free cash flow. Separately, the team will still do net debt and working capital — related, but not the same schedule.
Reported EBITDA: €5.00m. Minus pulled-forward shipments: €0.20m. Minus grant income that expires: €0.15m. Plus founder salary above a replacement CEO: €0.30m. Minus under-accrued warranties: €0.25m. Adjusted EBITDA: €4.70m.
At 8.0×, that €0.30m swing is €2.4m of enterprise value. The argument at the table is not “the multiple” — it is the bridge.
Buyers use QoE to avoid paying for earnings that were manufactured by policy. Sellers use a vendor QoE to put their own bridge on the table first. Both sides should expect the definition of EBITDA in the SPA to lock whatever they agreed.
Calling every add-back “non-recurring.” Ignoring that cash conversion below ~70% of EBITDA often signals working-capital or revenue-recognition issues. Using last month’s run-rate as if it were a year. Treating QoE as optional on a “simple” company.
QoE is historical with a short forward overlay. It cannot prove next year’s bookings. Materiality and time-box mean some accounts get a lighter touch. Fraud intended to defeat a review can still succeed.
The QoE is only as good as the underlying ledger, customer and cash files. Dazur’s approach is to structure those files so the QoE, the valuation and the purchase price adjustment are not three different versions of the company. Practitioners’ shorthand for the deliverable is covered on the QoE page.