The Role of Quality of Earnings (QoE) in Mid-Market Deals

Why Quality of Earnings Is a Deal-Maker or Deal-Breaker

In mid-market M&A transactions, headline EBITDA numbers rarely tell the full story. Buyers, investors, and lenders increasingly rely on quality of earnings (QoE) analysis to understand the true, sustainable profitability of a business.

Unlike audited financial statements, QoE focuses on economic reality rather than accounting formality. For sellers, a strong QoE report can accelerate deal timelines and improve valuation. For buyers, it is a critical risk-mitigation tool.

This blog explains the role of quality of earnings in mid-market deals and why it has become essential in today’s transaction environment.

What Is Quality of Earnings (QoE)?

Quality of earnings analysis is a detailed financial review designed to assess:

• Sustainability of earnings
• Accuracy of EBITDA
• Normalised operating performance
• Risks hidden within financial statements

QoE is typically performed during buy-side or sell-side due diligence and complements broader investment banking support services in mid-market transactions.

Why Quality of Earnings Matters in Mid-Market Deals

Mid-market businesses often exhibit:

• Owner-driven cost structures
• One-off or non-recurring income
• Informal accounting and controls

QoE bridges the gap between reported numbers and economic truth—making it invaluable for transaction decision-making, valuation certainty, and lender confidence.

Key Components of a Quality of Earnings Analysis

1. EBITDA Normalisation

QoE adjusts EBITDA for:

• One-time or non-recurring income and expenses
• Excess or non-market owner compensation
• Related-party transactions

This process results in a true, sustainable run-rate EBITDA that directly impacts valuation.

2. Revenue Quality Assessment

Revenue analysis focuses on:

• Customer concentration risk
• Revenue recognition practices
• Contractual visibility, churn, and sustainability

Unstable or inflated revenue streams materially affect deal value.

3. Expense & Margin Analysis

QoE evaluates:

• Cost structure consistency
• Margin volatility across periods
• Scalability of operations

This helps buyers assess future profitability under different growth scenarios.

4. Working Capital Review

Understanding working capital dynamics helps:

• Set purchase price adjustments
• Identify cash-flow risks
• Reduce post-close disputes

Use Cases: How Quality of Earnings Impacts Mid-Market Deals

Use Case 1: Sell-Side Preparation Before Going to Market

A founder-led business prepares for sale. A sell-side QoE:

• Normalises EBITDA before buyers do
• Eliminates surprises during diligence
• Strengthens valuation defensibility

This often results in faster processes and fewer price renegotiations.

Use Case 2: Buy-Side Risk Identification

A strategic buyer evaluates a mid-market acquisition. Buy-side QoE:

• Identifies overstated EBITDA
• Flags customer concentration and margin risk
• Supports valuation negotiation

QoE protects against post-close earnings erosion.

Use Case 3: Private Equity Platform Investment

PE investors rely on QoE to:

• Validate sustainable earnings
• Inform leverage and financing assumptions
• Structure earn-outs or escrows

Even small EBITDA adjustments can materially impact returns.

Use Case 4: Lender & Financing Support

Lenders often require QoE to:

• Validate cash-flow coverage
• Assess working capital adequacy
• Reduce credit risk

QoE improves financing certainty and speed.

Buy-Side vs Sell-Side Quality of Earnings

Buy-Side QoE

• Identifies risks and red flags
• Supports valuation negotiation
• Protects against post-close surprises

Sell-Side QoE

• Prepares the business for sale
• Reduces buyer diligence friction
• Improves deal certainty and speed

Sell-side QoE frequently leads to smoother, faster closings.

Common Findings in Mid-Market QoE Reports

Typical issues uncovered include:

• Overstated or volatile EBITDA
• Non-recurring revenues presented as core
• Hidden liabilities or under-accrued expenses
• Weak financial controls

Identifying these early prevents deal disruption.

Quality of Earnings and Valuation Impact

QoE directly influences:

• Valuation multiples
• Purchase price negotiations
• Deal structure (earn-outs, escrows, holdbacks)

Even minor EBITDA adjustments can have a significant valuation impact in mid-market transactions.

Checklist: Preparing for a Successful QoE Engagement

Before initiating a QoE, companies should ensure:

• ✅ Clean historical financial statements (monthly preferred)
• ✅ Clear separation of personal vs business expenses
• ✅ Documentation for one-time and non-recurring items
• ✅ Revenue contracts and customer data organised
• ✅ Working capital schedules prepared
• ✅ Consistency between management reporting and financials
• ✅ Alignment between QoE findings and valuation assumptions
• ✅ Early engagement—before formal due diligence begins

This checklist reduces friction and improves deal readiness.

Best Practices for Quality of Earnings Analysis

1. Start Early

Early QoE preparation minimises surprises during diligence.

2. Maintain Transparency

Clear documentation builds buyer and lender confidence.

3. Use Independent Experts

Independence enhances credibility with investors, lenders, and advisors.

4. Align QoE with Valuation

QoE findings should directly inform valuation and deal structure.

How Synpact Consulting Supports Quality of Earnings

Synpact Consulting provides quality of earnings support for mid-market transactions, including:

• Buy-side and sell-side QoE analysis
• EBITDA normalisation and adjustments
• Revenue and margin sustainability assessment
• Working capital and cash-flow analysis
• Deal-ready, investor-grade reports

Our QoE reports are designed to withstand scrutiny and support confident deal decisions.

Conclusion: QoE Is the Foundation of Deal Confidence

In mid-market transactions, quality of earnings is not optional—it is foundational. A disciplined QoE process protects value, improves deal certainty, and enables smarter negotiations.

For both buyers and sellers, investing in QoE early delivers measurable returns.

Frequently Asked Questions (FAQ) on Quality of Earnings

Preparing for a mid-market transaction?

Engage Synpact Consulting for quality of earnings analysis that protects value and accelerates deal success.