What is a quality of earnings report?
A quality of earnings (QoE) report is a financial due diligence analysis, usually commissioned by the buyer, that normalizes EBITDA, tests whether revenue and expenses are reliable, and flags risks that affect the purchase price. Breakwater M&A puts the fee at $10,000 to $25,000 for a business with under $1M of EBITDA, rising to $50,000 to $150,000 at $10M to $25M.
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Definition
A quality of earnings report is a diligence workpaper prepared by an accounting firm for a buyer, assessing whether reported EBITDA reflects sustainable, recurring earnings a new owner can expect to repeat.
The detail
A QoE report covers four things. First, EBITDA normalization: removing non-recurring items, adjusting owner compensation to market, reversing related-party rent to fair market value, and eliminating personal expenses run through the practice. Second, revenue testing: looking at month-over-month trends for seasonality, one-time contracts, customer or payer concentration, and collection quality (does reported revenue actually turn into cash within a reasonable window). Third, working capital analysis: establishing a normal level of receivables, payables, and accrued liabilities so the closing working capital peg reflects how the business actually runs. Fourth, risk flags: provider dependency, payer contract renewal risk, coding patterns that look outside norms, deferred maintenance on equipment, and compliance exposure. Breakwater M&A says most QoE engagements take 4 to 6 weeks, and HealthValue Group, which prepares them for healthcare organizations, says most take 3 to 6 weeks. Fees scale with EBITDA: Breakwater lists $10,000 to $25,000 under $1M, $15,000 to $40,000 at $1M to $3M, $25,000 to $75,000 at $3M to $10M and $50,000 to $150,000 at $10M to $25M. More sellers now commission a sell-side QoE before going to market, which Breakwater says typically costs 10 to 20 percent less than a buy-side one.
Typical QoE fees by EBITDA: $10K–$25K under $1M (3–4 weeks), $15K–$40K at $1M–$3M (4–6 weeks), $25K–$75K at $3M–$10M (4–6 weeks), and $50K–$150K at $10M–$25M (6–8 weeks).
Source: Breakwater M&A, Quality of Earnings Report Cost (Sep 2026)
A sell-side QoE typically costs 10–20% less than a buy-side one, and a completed sell-side report often shaves 2–4 weeks off the buyer's diligence.
Source: Breakwater M&A, Quality of Earnings Report Cost (Sep 2026)
Most healthcare QofE projects take 3–6 weeks, depending on the complexity of the business and how quickly the practice's team responds.
Source: HealthValue Group, Healthcare Quality of Earnings Analysis and Reports
What this means for clinic owners
From Sorso
If you plan to sell, a sell-side QoE lets you find and fix issues before a buyer does, and the normalized EBITDA it produces is the number buyers anchor to. Breakwater suggests commissioning it 2 to 3 months before going to market.
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What does a medical practice valuation cost?
A formal medical practice valuation costs from about $2,500 to $50,000 or more, depending mainly on the type of engagement and what the valuation is for. Peak Business Valuation puts a typical medical practice valuation at around $2,500 to $8,000 or more, while Nouvelle Analytics, a valuation firm, quotes $4,000 to about $10,000 for a calculation engagement and $8,000 (summary report) to $50,000+ (detailed report) for a full valuation engagement.
How do you prepare a med spa for sale?
Start 24 to 36 months before you talk to a buyer, which is when CT Acquisitions says the owners who get top-quartile multiples begin. The financial work comes first: move the books to accrual, track prepaid packages, memberships and gift cards as deferred revenue, document every add-back as it happens, and get a monthly service-line P&L. Then cut the business's dependence on you and on any single injector, fix the medical director and ownership structure, and run a sell-side quality of earnings in the final year.
How do PE firms value medical practices?
Private equity firms value a medical practice as a multiple of its trailing-twelve-month adjusted EBITDA, and the multiple rises with scale. Published ladders run from 2.5–4x for a single owner-operated physical therapy clinic (Breakwater M&A) to 10x–20x for large primary care platforms (Scope Research), and payer mix, growth and owner dependence move a practice within its band.
What are EBITDA add-backs in practice valuation?
EBITDA add-backs are non-recurring or owner-related expenses added back to reported EBITDA to show normalized earnings, the figure a buyer applies its multiple to. In an owner-operated practice they usually cover above-market owner pay, personal expenses run through the business, one-time costs and pro forma adjustments, and each one needs documents to survive a buyer's diligence.
What is an LOI in healthcare M&A?
A letter of intent (LOI) in healthcare M&A is a mostly non-binding agreement that sets the proposed purchase price, structure, exclusivity period, and diligence timeline before a buyer commits the resources to close a deal. The exclusivity and confidentiality clauses are the parts that usually bind.
What is a working capital peg in an M&A deal?
A working capital peg is the target level of net working capital the buyer expects at close; delivery above or below the peg results in a dollar-for-dollar purchase price adjustment, which can move the headline price at close in either direction.
How long does it take to sell a medical practice?
Selling a medical practice to a PE buyer usually takes about six to nine months from hiring an advisor to closing. FOCUS Investment Banking says its healthcare sell-side process typically takes 6 months, and broker Raincatcher puts a clinic or small-group sale at six to nine months: preparation and valuation in months one to two, marketing and offers in months two to five, and diligence, licensing and closing in months five to nine.
What is a data room in healthcare M&A?
A data room is the secure online repository where a seller uploads financial, legal, clinical, and operational documents for buyer diligence, organized in folders that follow the buyer's diligence request list.
What is reps and warranties insurance in M&A?
Reps and warranties insurance (RWI) is a buyer-side policy that covers financial losses from breaches of seller representations in the purchase agreement. Marsh puts average premiums for US and Canadian deals at 3.0% to 3.7% of the policy limit in early 2026.
What is pro forma EBITDA in a practice valuation?
Pro forma EBITDA adjusts historical earnings for known future changes like new providers hired mid-year, fee schedule increases in effect, or a recently-opened location running below capacity, typically reflecting a full year of annualized performance.
How much does a quality of earnings report cost for a medical practice?
A quality of earnings (QoE) report for a medical practice typically costs $10,000 to $75,000 for practices with under $10M of EBITDA, based on Breakwater M&A's published fees: $10,000 to $25,000 under $1M of EBITDA, $15,000 to $40,000 at $1M to $3M, and $25,000 to $75,000 at $3M to $10M. Larger groups with $10M to $25M of EBITDA pay $50,000 to $150,000. A sell-side report typically costs 10 to 20 percent less than a buy-side one, and Breakwater's figures cover businesses generally, not healthcare specifically.
Founder of Sorso and a CFA charterholder. Before Sorso, Stan spent 19 years in corporate finance at institutions including UniCredit and Société Générale — managing a $450M loan portfolio and making senior partner at a major mezzanine lender by 29 — then built a fractional CFO firm exclusively for outpatient healthcare clinics.
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