What is a quality of earnings report?
A quality of earnings (QoE) report is a buyer-commissioned financial due diligence analysis that normalizes EBITDA, tests the reliability of revenue and expenses, and identifies risks that affect purchase price, typically costing $50K to $150K for a healthcare practice.
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. A QoE typically runs 4 to 8 weeks and costs $50,000 to $150,000 for a single or multi-location practice depending on complexity. Sellers increasingly commission a sell-side QoE before going to market to control the narrative.
Sell-side QoE reports (commissioned by the seller before going to market) typically increase the final clearing multiple by normalizing issues buyers would otherwise use to chip price.
Source: AICPA M&A practice guidance
Buyer-side QoE reports cost $50,000 to $150,000 for most healthcare practices, with the buyer typically paying but the cost sometimes absorbed into the closing adjustments.
Source: Pitchbook Healthcare Services
What this means for clinic owners
From Sorso
If you are thinking about selling within 24 months, a sell-side QoE is usually the single highest-ROI diligence spend. It lets you fix issues before a buyer finds them, and the resulting normalized EBITDA is the number every buyer will anchor to.
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What does a medical practice valuation cost?
A formal medical practice valuation costs $5,000 to $25,000 depending on practice size, purpose (sale, divorce, partner buy-in, estate), and whether you need a calculation engagement (lower cost, narrower scope) or a full opinion of value (higher cost, defensible in court).
How do PE firms value medical practices?
Private equity firms value medical practices primarily on a multiple of trailing twelve-month adjusted EBITDA, typically 5x to 12x, with the multiple driven by scale, growth, payer mix, and provider retention.
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, typically increasing reported EBITDA by 10 to 30 percent in owner-operated practices.
What is an LOI in healthcare M&A?
A letter of intent (LOI) in healthcare M&A is a 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.
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, typically reducing a headline price by 3 to 8 percent at close.
How long does it take to sell a medical practice?
Selling a medical practice to a PE buyer typically takes 6 to 12 months from engagement to close, with 2 to 3 months of prep, 1 to 2 months of marketing, 2 to 3 months of diligence and negotiation, and 1 to 2 months for definitive documents and closing.
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, typically containing 500 to 2,000 files organized across 15 to 25 top-level categories.
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, typically priced at 2.5 to 4 percent of coverage amount for healthcare deals.
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 sell-side quality of earnings (QoE) report for a medical practice typically costs roughly $35,000 to $100,000+, depending on practice size, complexity, and the depth of analysis. Smaller single-location practices fall at the lower end; multi-location groups and platforms with rollup activity push toward and beyond the upper end. The fee is almost always recovered in higher purchase price or smoother diligence.
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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