Sell-Side Quality of Earnings Checklist

Sell-Side QoE Checklist: What a QoE Analysis Will Examine and Often Reveal

A Quality of Earnings (QoE) analysis is a critical part of financial due diligence in any transaction. It is designed to evaluate whether a company’s reported earnings are accurate, sustainable, and reflective of true operating performance. Oftentimes, this report is central to assist with negotiations for better terms.

For sellers who know a QoE will be part of the process, but aren’t sure what to expect or where to focus attention, this checklist is designed to provide clarity.

This Quality of Earnings checklist serves as a financial due diligence readiness tool, providing a walkthrough of the key areas a QoE analysis will examine, what it may uncover, and how those findings can impact deal negotiations. The goal is to help you identify potential risks, gaps, and opportunities within your financials before they are ever scrutinized by a buyer, a third-party diligence team, or through your own sell-side QoE report.

This checklist may also serve as a helpful reference point for buyers seeking a clearer understanding of what a QoE analysis covers.

While this checklist provides a high-level view of the QoE process, it is not a substitute for a formal analysis. A full Quality of Earnings report should be performed by a qualified CPA or QoE provider (such as CKH Group).

QoE Checklist

1. Earnings & EBITDA Adjustments

A QoE will break down reported earnings to determine what is truly recurring and operational.

☐ Identification of non-recurring or one-time income and expenses

☐ Evaluation of add-backs and whether they are appropriate and supportable

☐ Normalization of owner compensation and discretionary spending

☐ Removal of non-operating or unrelated business activity

☐ Reconciliation of EBITDA to underlying financial records

What this reveals:
The profit number you’re using to value the business may not be the most accurate measure of performance. A QoE takes into account unusual or inconsistently treated items – meaning some add-backs may not hold up under scrutiny, while others may have been missed entirely.

For Example:
A business unintentionally undervalues its business. It reports $2M in EBITDA but hasn’t adjusted for unusually high owner compensation and several one-time expenses tied to a facility move. A QoE identifies an additional $400K in legitimate add-backs, bringing true EBITDA to $2.4M.

2. Revenue Quality & Sustainability

A QoE evaluates not just how much revenue exists but how dependable it is and how reliable it is to continue.

☐ Breakdown of revenue by source, customer, or service line

☐ Identification of recurring vs. non-recurring revenue streams

☐ Analysis of customer concentration and dependency risk

☐ Review of revenue trends and consistency over time

☐ Testing of revenue recognition and cut-off practices

What this reveals:
Revenue may look strong on paper, but it may not be stable or repeatable. A large portion of it might come from a small number of customers or one-time projects.

For Example:
A company shows steady annual growth, but a QoE finds that 40% of last year’s revenue came from a single customer contract that won’t repeat. Buyers may discount that revenue when valuing the business. Alternatively, if you can prove substantial recurring revenue, your QoE may support a higher valuation multiple.

3. Margins & Cost Structure

A QoE evaluates whether margins reflect the true cost of running the business.

☐ Analysis of gross margin trends and fluctuations

☐ Review of cost classification and allocation

☐ Identification of one-time or unusual expenses

☐ Assessment of fixed vs. variable cost structure

☐ Evaluation of changes in profitability over time

What this reveals:
Profit margins may look better or worse than they actually are because costs aren’t categorized or tracked consistently.

For Example:
A company has certain labor costs incorrectly recorded as one-time overhead costs instead of cost of goods sold, making gross margins appear stronger than they actually are. When corrected, gross profit decreases. Whereas it did not change EBITDA, we still see a proper classification is very important (for example for bolt-on acquisitions). Alternatively, a company showing declining margins may be able to isolate temporary cost pressures, which (once normalized) support a more favorable view of long-term performance.

4. Working Capital & Cash Flow Reality

A QoE tests whether reported earnings translate into actual cash.

☐ Analysis of accounts receivable aging and collectability

☐ Review of accounts payable timing and obligations

☐ Evaluation of inventory accuracy and valuation (if applicable)

☐ Assessment of working capital trends and requirements

☐ Comparison of EBITDA to actual cash generation

What this reveals:
A business can appear profitable but still struggle with cash – often because funds are tied up in receivables, inventory, or timing issues.

For Example:
The company reports strong profits, but a large portion of revenue hasn’t been collected yet. A QoE finds that some receivables are slow-paying or unlikely to be collected, reducing the company’s true cash position.

5. Financial Consistency & Integrity

A QoE evaluates whether financial reporting is reliable and consistent over time.

☐ Comparison of financial statements across multiple periods

☐ Alignment between financial statements and tax filings

☐ Review of accounting policies and consistency

☐ Analysis of supporting schedules and documentation

☐ Identification of unusual or unsupported journal entries

What this reveals:
The numbers may not fully line up across reports, or they may have been prepared differently over time, making it harder to rely on them.

For Example:
A company’s financials are accurate, but prepared inconsistently year over year. Cash basis used in year one, accrual basis used in year two, tax basis used in year three, without any adjustments and normalization.

6. Risk Areas & Red Flags

A QoE is designed to surface risks that may not be obvious at first glance.

☐ Customer or vendor concentration risks

☐ Unexplained fluctuations in revenue or profitability

☐ Seasonality or timing distortions

☐ Related-party transactions

☐ Contingent liabilities or unresolved financial issues

What this reveals:
There may be hidden risks that could affect how stable or valuable the business is—even if the financials look strong overall.

For Example:
A company relies heavily on a single supplier for key materials. A QoE identifies this dependency as a risk, as any disruption could impact operations and revenue. When addressed proactively, this risk can be contextualized rather than discovered late in diligence.

 

Conclusion

Many businesses believe they are prepared for a Quality of Earnings analysis or are already aware of potential red flags, but underestimate what a QoE may uncover and how much those findings can influence deal terms.

Understanding where scrutiny will occur allows you to anticipate buyer questions, identify gaps in advance, and prepare the context and support needed to explain your financials with confidence. With that clarity, you’re better positioned to guide the conversation, speak confidently with your accountants, and protect the outcome of your transaction.

 

About CKH Group

CKH Group provides Quality of Earnings and transaction advisory services to support businesses through critical financial events. Our team has experience across both sell-side and buy-side engagements, with a focus on identifying risk areas, validating earnings, and uncovering opportunities that may impact valuation or deal structure.

If you are preparing for a transaction or want to better understand how a QoE analysis may impact your business, we welcome the opportunity to connect.

The above article only intends to provide general financial information and is based on open-source facts, it is not designed to provide specific advice or recommendations for any individual. It does not give personalized tax, financial, or other business and professional advice. Before taking any form of action, you should consult a financial professional who understands your particular situation. CKH Group will not be held liable for any harm/errors/claims arising from the articles. Whilst every effort has been taken to ensure the accuracy of the contents, we will not be held accountable for any changes that are beyond our control.