Limited Scope Quality of Earnings (QoE) Reports: Everything You Need to Know

In mergers and acquisitions (M&A), due diligence is a critical step that determines the success of a deal, especially as transactions become more complex. A key component of this process is developing a Quality of Earnings (QoE) report, which provides a clear and accurate assessment of a seller’s financial health.  

However, without the right preparation and expertise, this analysis can quickly become a time-consuming, costly, and intricate endeavor – making a limited scope QoE a valuable tool for streamlining due diligence while still uncovering essential financial insights.   

And especially for smaller-scale transactions, a limited scope QoE report may even be more optimal. 

As experts in helping growing organizations maximize the value of a deal, we’ve outlined some essential information about limited scope QoE reports. 

Important things to know about limited scope quality of earnings (QoE) reports:

1. What a quality of earnings report is 
2. What a limited scope quality of earnings report is
3. Key components of a limited scope QoE report
4. Focuses of a limited scope QoE report 
5. When it’s time to use a limited scope QoE report 

What is a Quality of Earnings (QoE) Report? 

A Quality of Earnings (QoE) report is an essential step in M&A due diligence that provides a detailed analysis of financial and accounting findings to help buyers gain a clearer understanding of a vendor’s business.  

By refining and examining these findings, the QoE report offers the buyer greater confidence to proceed with the merger or acquisition. Typically, an independent third party is brought in to conduct the report. 

What is a Limited Scope Quality of Earnings Report? 

A limited scope QoE report is a streamlined version of a traditional Quality of Earnings analysis, focusing on specific financial areas rather than conducting a full-scale review. This targeted approach allows buyers to gain deeper insights into what’s most important to them – whether this is key revenue streams, expense categories, or financial metrics crucial to the transaction – and without the cost and time investment required for a comprehensive QoE report. 

Traditionally, Quality of Earnings reports were primarily conducted by large accounting firms like Deloitte and with the Big Four, offering full-scale financial diligence for platform investments. However, as deal structures and due diligence needs have evolved, scope QoE reports have emerged as a more cost-effective and efficient alternative.  

These reports are particularly useful for private equity firms, strategic buyers, and investors who already have a strong understanding of the seller’s business but need to verify specific financial aspects before closing a deal.  

Instead of sifting through extensive financial statements and complex reports, a limited scope QoE provides a focused analysis using key financial data, making it a practical and valuable tool for M&A transactions. 

Key Components of a Limited Scope Quality of Earnings Report: 

• Revenue Verification: Ensures that reported revenue is accurate, often focusing on key revenue streams rather than the entire revenue picture. 
• Expense Analysis: Evaluates major expenses to identify any irregularities or areas that may require additional analysis. 
• EBITDA Adjustments: Reviews and adjusts EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) to reflect the true operational profitability of the organization. 
• Working Capital Analysis: Provides an overview of the company’s working capital, ensuring it aligns with the transaction’s terms and conditions. 
• One-Time and Non-Recurring Items: Identifies and analyzes any non-recurring or one-time items that could skew the financial picture. 

Focuses of a Limited Scope Quality of Earnings Report 

A limited scope Quality of Earnings (QOE) analysis focuses on key financial areas to provide a streamlined yet insightful assessment of a company’s financial health.  

Income Statement and Quality of Earnings 

The income statement review recalculates gross, operating, and net profit margins to verify earnings reliability by analyzing historical financial performance, net revenue, cost of revenue, and operating expenses.  

This process also includes evaluating management’s EBITDA adjustments and identifying any one-time, non-recurring charges or non-operating, non-cash costs that may distort financial trends.  

Balance Sheet 

The balance sheet analysis offers a comprehensive review of key components to assess the company’s financial sustainability and stability for future growth.  

Working Capital 

Additionally, working capital is carefully examined by reviewing current assets such as cash, accounts receivable, and inventory alongside current liabilities to accurately assess financial health and operational liquidity. 

When is it time to use a Limited Scope Quality of Earnings Report? 

Limited scope QoE reports are best used when the transaction is smaller in value. With smaller transactions, the time and money it takes to develop a comprehensive QoE report may not be justified. Limited scope QoE reports will provide a more cost-effective yet reliable outcome – and always with focused analysis on what is most important to you.  

In addition, if companies are looking to expedite the close process, obtain targeted insights they need to make informed decisions, or are looking for more flexibility in their reports, a limited scope QoE may be more preferable to pursue. 

Final Thoughts on Limited Scope QoE Reports 

Limited scope QoE reports offer an efficient and cost-effective solution for transactions where a full QoE might be unnecessary. By providing targeted insights into key financial areas, these reports help both buyers and sellers navigate deal complexities with ease. 

If you’re considering a limited scope QoE report for your next transaction, working with a financial consulting firm that specializes in this service can make all the difference.