NIGEL GORDON
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Quality of Earnings Report When Buying a Business in Australia: What It Is and When You Need One

Nigel Gordon·
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A quality of earnings (QoE) report is a financial analysis that determines whether a business's reported profits are real, sustainable, and likely to repeat after you take over. It is not a valuation. It is not an audit. It is specifically designed to answer the question every business buyer in Australia should be asking: "Is this business actually making the money the seller says it is — and will it keep making that money once I'm running it?"

That distinction matters a lot. A set of tax returns can show you what the accountant filed. A QoE report shows you what the business actually earned, after you strip out the things that make the numbers look better than they are.

This is Module 5 territory — the part of the due diligence process that most first-time buyers rush or skip entirely.

What Is Included in a Quality of Earnings Report?

A QoE report typically covers four areas:

Revenue analysis. Is revenue growing, flat, or quietly declining? Are there one-off contracts that inflated last year's numbers? Is revenue recognised when the work is done, or when the invoice is raised — and does that timing mismatch create a misleading picture?

EBITDA normalisation. The most important part for buyers. The analyst goes through every adjustment the seller has made to the reported EBITDA — owner salary, personal expenses run through the business, one-time costs — and determines which of them are legitimate and which are optimistic. This is closely related to how to normalise EBITDA — a process sellers do themselves, with obvious incentives to be generous. A QoE is the buyer's version of the same exercise, done by someone with no stake in the outcome.

Working capital analysis. What does the business actually need to operate on a day-to-day basis? Is the seller leaving you enough cash in the business, or will you need to inject capital immediately after settlement?

One-off and non-recurring items. The government stimulus payment from 2021 that boosted revenue. The large contract from the seller's personal contact that won't transfer. The super contributions the seller hasn't been making properly. All of these affect the real earning power of the business going forward.

A thorough QoE also looks at customer concentration, revenue sustainability by customer type, and — particularly for trades businesses — whether the revenue depends heavily on relationships the current owner holds.

Who Pays for a Quality of Earnings Report?

In Australia, the buyer usually pays for the QoE report. It is commissioned by the buyer, conducted by an independent accounting firm or specialist M&A advisory firm, and delivered to the buyer for their use in the deal.

Occasionally, a seller will commission a "sell-side QoE" before going to market — essentially getting in first to show sophisticated buyers that the numbers have already been independently reviewed. This is more common in larger transactions and can reduce negotiating friction. It is not something you'll see often in sub-$5 million deals.

If you see a seller who has produced a sell-side QoE for a small business, that is either very professional — or a signal that they're pre-empting questions you should definitely be asking (I've seen both).

What Does a Quality of Earnings Report Cost in Australia?

Pricing varies by deal size and complexity, but as a rough guide:

For businesses under $2 million EBITDA, expect to pay $15,000 to $30,000 for a proper QoE. For a business in the $500K–$1.5M purchase price range — which is where most readers of this site are operating — a limited-scope QoE from a smaller advisory firm will often run $8,000 to $15,000.

Some accountants will do a "QoE-lite" — a focused financial review rather than a full institutional-style analysis — for $5,000 to $10,000. This is often sufficient for a straightforward trades business with clean books.

The cost of getting it wrong is higher. If you overpay by $100,000 for a business because you took the seller's EBITDA adjustments at face value, the $12,000 you saved on the QoE looks foolish in retrospect.

When Do You Actually Need a QoE Report?

This is the honest answer: not always — but more often than most Australian buyers think.

You almost certainly need a proper QoE if:

  • The purchase price is above $500,000
  • The seller is presenting "adjusted EBITDA" with significant add-backs (more than 20% of reported profit)
  • The business has multiple revenue streams or complex accounting
  • There are related-party transactions (owner renting premises to the business, family members on the payroll)
  • The business changed hands in the last five years and you can't verify what changed under the new owner

You can probably get by with a more limited financial review if:

  • The business is simple and owner-operated with minimal staff
  • Revenue is clearly verifiable (cash sales, direct bank deposits, recurring contracts with public bodies)
  • The purchase price is under $300,000 and you're comfortable with the underlying financial records you've been given

For trades businesses specifically — plumbing, electrical, HVAC, landscaping, pest control — the main risks are owner-dependency (revenue follows the owner, not the business), cash revenue that doesn't hit the bank, and inflated add-backs for the owner's personal vehicle, travel, and equipment.

A QoE won't always surface cash-in-hand revenue that was never recorded. But it will tell you whether the revenue that was recorded looks sustainable and whether the margin the seller is claiming is consistent with what the business should be earning at that size and type.

Red Flags a Quality of Earnings Review Often Finds

In my experience looking at deals in the Australian market, these come up most often:

Revenue timing manipulation. Invoices raised at year-end for work not yet completed, or work completed before year-end but not invoiced. This moves revenue between periods to make the current year look better.

Discretionary add-backs that don't hold up. The seller's salary is added back because "a replacement manager could be hired for $80,000." Then you look at the actual work required and realise a competent replacement is $120,000. That's a $40,000 difference on a business trading at 3x EBITDA — a $120,000 overcharge.

Non-recurring items that recur. I've seen owners add back legal costs for "a one-time dispute" — and then you look at the previous year's financials and there was a different legal dispute. There's always a different one.

Related-party rent at below-market rates. The owner also owns the building and charges the business $2,000 a month. Market rent is $4,500. The business looks more profitable than it will be when you're paying someone else's rent. This is especially common in asset versus share sale structures where the property doesn't transfer.

Unrealistic owner salary add-backs. For a business doing $800K in revenue with the owner working full-time, adding back a $60K salary and claiming "you can run this part-time" is not credible.

The full checklist of what to look for is in the Quality of Earnings Checklist — grab it free if you're currently working through the numbers on a deal.

The Difference Between a QoE and an Audit

An audit confirms that the accounts have been prepared in accordance with accounting standards. It does not confirm that the business is as profitable as the seller says it is.

A quality of earnings analysis is specifically designed to determine whether reported earnings are sustainable and representative. It is forward-looking: not "did the accountant follow the rules?" but "will this business generate these earnings under new ownership?"

If you're shown audited accounts, that's a good sign — it means the numbers have been independently verified for compliance. It does not mean the QoE adjustments are clean or that the seller's EBITDA normalisation is conservative.

You need both: verified accounts and a QoE analysis. They answer different questions.

How a QoE Fits Into the Broader Due Diligence Process

A QoE is one component of confirmatory due diligence — the detailed investigation you conduct after you've signed a letter of intent but before you commit to settlement. It sits alongside legal due diligence, operational due diligence, and tax due diligence.

The typical sequence for a mid-market Australian acquisition looks like this:

  1. Preliminary review of the Information Memorandum
  2. Initial financial review — checking the financials look plausible
  3. Letter of Intent (LOI) signed
  4. QoE commissioned alongside legal and operational DD
  5. Findings from QoE feed into final price negotiation
  6. Sale and Purchase Agreement (SPA) reflects any QoE-driven adjustments

The findings from a QoE often feed directly into price renegotiation. If the QoE uncovers $80,000 in EBITDA add-backs that don't hold up, and the business was priced at 3x EBITDA, that's a $240,000 reduction in the justifiable purchase price. Most sellers expect some renegotiation after due diligence. A well-executed QoE gives you the ammunition to do it based on fact rather than intuition.

Understanding the financial red flags when buying a business will help you identify issues before you even commission a formal QoE — which is a good way to decide whether you need one at all.

Frequently Asked Questions

Does a quality of earnings report give a value to a company?

No. A QoE report assesses whether the company's earnings are real and sustainable — it tells you what the business actually earns. A separate valuation then applies a multiple to those earnings to arrive at a purchase price. The QoE is an input to the valuation, not the valuation itself.

What is quality of earnings for a small business?

For a small business, a QoE typically focuses on normalising the owner's salary and add-backs, verifying that revenue is genuine and recurring, and identifying any one-time items that inflated recent profits. The scope is usually narrower than for larger deals, but the core questions are the same.

What is the average cost of a quality of earnings report in Australia?

For small businesses (purchase price under $2 million), a focused QoE from an Australian advisory firm typically costs $8,000 to $20,000. A full institutional-style QoE for a larger transaction will cost more. Some accountants offer limited-scope financial reviews for $5,000 to $8,000 that cover the basics.

Who pays for a quality of earnings report?

The buyer pays. The QoE is commissioned by the buyer to verify the seller's financial representations. Occasionally a seller will commission a sell-side QoE before going to market, which they then share with buyers — but this is uncommon in the sub-$5 million market.

What is included in a quality of earnings report?

Revenue analysis, EBITDA normalisation, working capital assessment, and review of one-time or non-recurring items. More detailed reports also include customer concentration analysis, cash flow analysis, and an assessment of revenue sustainability under new ownership.

The Bottom Line

A quality of earnings report is not glamorous. It's the financial equivalent of getting a building inspector in before you buy a house — nobody wants to pay for it, everyone is relieved when it comes back clean, and the deals where you skip it are the ones where you later wish you hadn't.

If you're looking at a business priced above $500,000, or one where the seller is presenting adjusted earnings that look meaningfully better than the tax returns, a QoE is not optional — it's the most efficient $10,000 to $20,000 you'll spend in the whole deal process.

For a full checklist of what to look for, grab the free Quality of Earnings Checklist.

For more on how to check financials when buying a business in a broader sense — including what to ask for and how to read what you've been given — that's worth reading before you commission the QoE.

This is all covered in detail in Module 5 of the Playbook — the due diligence section, which walks through the full sequence from preliminary review to settlement.

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