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Due Diligence
POSTED BY
Deal Junkie Editorial Team
DURATIONS
7 Min Read
PUBLISHED
Nov 23, 2025
Understanding Quality of Earnings for Small Business Acquisitions
When you are acquiring a small business, the numbers on the surface rarely tell the full story. Revenue might look stable, margins may appear strong, and cash flow could seem healthy, but none of that guarantees the business is truly performing as advertised. This is where a Quality of Earnings review becomes critical.
Quality of Earnings, or QoE, focuses on how reliable, sustainable, and repeatable a company’s earnings really are. Instead of just accepting the income statement at face value, a QoE review digs into what is behind those numbers. It looks at the composition of revenue, the consistency of margins, the impact of one time items, and the adjustments needed to understand the true earnings power of the business.
For buyers such as searchers, independent sponsors, family offices, and first time acquirers, understanding Quality of Earnings can be the difference between buying a healthy asset and walking into a problem. Deal Junkie exists to bridge that gap by connecting buyers with finance professionals who have prepared QoE analyses at banks, private equity firms, and accounting practices so small business buyers can access the same level of rigor that large institutions use.
Why Quality of Earnings Matters in Small Business Deals
Most small businesses do not have perfectly clean books. They may rely on QuickBooks, a local accountant, or spreadsheets that have evolved over years. Because of this, financial statements often include owner add backs, discretionary spending, one time gains, and misclassified items that distort the real profitability of the company.
A Quality of Earnings review filters this noise. One of the first goals is to validate seller provided EBITDA. In many deals, EBITDA is the main valuation anchor, but sellers may include aggressive adjustments that inflate the number. A QoE professional tests each adjustment, separating what is truly non recurring from what is likely to continue after the buyer takes over. That process gives the buyer a clearer view of normalized earnings and reduces the risk of overpaying.
Revenue quality is another key focus. A topline figure of three million dollars does not say much by itself. A QoE review asks how much of that revenue is recurring, how concentrated the customer base is, whether sales depend on a single client or season, and whether there are signs of churn. Understanding these patterns helps the buyer forecast future cash flow instead of assuming that last year’s performance will automatically repeat.
A proper QoE review also highlights operational and financial risks that do not show up cleanly on the P and L. These can include heavy reliance on a few employees, supplier concentration, cash flow volatility, tax exposures, or unrecorded liabilities. By surfacing these issues early, buyers can renegotiate terms, structure protections into the deal, or decide to walk away.
Working capital is another area that often surprises new buyers. A company may look profitable but require more cash in the business than expected to keep operations running smoothly. QoE work estimates the level of working capital that is truly needed so the buyer does not face an unexpected cash injection right after closing.
Finally, a QoE review analyzes the timing of revenue and expenses to detect manipulation or seasonal distortion. Large invoices pushed into one period, delayed expenses, or unusual spikes can artificially inflate short term results. Normalizing these effects gives a more honest baseline for valuation.
“A strong Quality of Earnings review protects buyers from paying for earnings that will not be there after closing.”
Using Deal Junkie to Access QoE Expertise
Traditional Quality of Earnings reports are often produced by big accounting firms with fees that start in the tens of thousands of dollars. That level of cost can put formal QoE work out of reach for many small business buyers. Deal Junkie makes this type of analysis more accessible by connecting buyers with experienced finance professionals on demand.
Through the platform, buyers can work with former investment bankers, private equity analysts, and consultants who have real transaction experience. You can define the scope you need, whether that is a targeted review of revenue quality and add backs or a deeper, more comprehensive QoE style engagement. Pricing is transparent, and buyers pay only for the support they choose, not for a large firm’s overhead.
The result is a higher level of confidence in the deal. With a proper Quality of Earnings review, you are not guessing about the sustainability of the business you are buying. You are validating earnings, understanding risk, and protecting your investment. That leads to better negotiations, fewer surprises after closing, and a smoother transition into ownership.
For anyone serious about acquiring a small business, Quality of Earnings work should not be viewed as an optional extra. It is one of the most important tools you have to make sure the numbers you are buying are real. Deal Junkie gives you a practical way to access that level of analysis without the traditional big firm price tag.
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