What is a quality of earnings report?
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.
Quick answer
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.
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.
Related questions
What does a medical practice valuation cost?
A formal medical practice valuation typically costs $5,000 to $25,000 depending on practice size, valuation purpose, and whether a calculation engagement or full opinion is required.
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.
Founder of Sorso. 19 years in corporate finance. Managed a $450M loan portfolio before building a fractional CFO firm exclusively for healthcare clinics.
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