A Quality of Earnings (QoE) report is a deep financial analysis performed by an independent accounting firm during a potential sale. Think of it as a complete financial diagnostic for your practice. It goes beyond your standard profit and loss statement to verify that your practice’s historical earnings are sustainable and a reliable predictor of future performance.
The analysis adjusts your reported EBITDA for any one-time events, owner-specific expenses, or accounting anomalies. The goal is to present a buyer with a “normalized” view of your practice’s true, ongoing profitability.
Why This Matters to Healthcare Providers
For a physician-owned practice, a QoE report is standard in any sale process. It gives a buyer the confidence to pay a premium valuation by proving the stability of your practice’s cash flow. It translates your financial history into a clear story of future potential.
Example in Healthcare M&A
Scenario: Dr. Allen, an orthopedist, wants to sell his successful practice. To maximize reported profits for the past few years, he has paid himself a salary of $200,000, which is well below the market rate of $450,000 for a surgeon with his productivity. His practice’s EBITDA appears to be $1 million.
Application: A potential buyer will commission a QoE report. The independent accountants will identify Dr. Allen’s below-market salary. They will add back his $200,000 salary and then subtract the market-rate salary of $450,000 to “normalize” the compensation expense.
Outcome: The QoE report will show a “normalized” or Adjusted EBITDA of $750,000 ($1,000,000 – $250,000 adjustment). This is the figure the buyer will use to calculate their valuation offer. While lower than the initial number, this figure is credible and provides a solid foundation for negotiating the final purchase price. Without a QoE, a buyer might walk away or propose a much lower, less defensible offer due to the uncertainty.
Related Terms
Preparing properly for buyer due diligence can prevent unexpected issues. Request a Due Diligence Preparation Session →
About the SovDoc M&A Glossary
Hand-curated by our deal-makers and analysts, the SovDoc glossary turns complex mergers-and-acquisitions jargon into clear, plain-English definitions.
Want to learn more? Explore the rest of our glossary or reach out to our team for deeper insights.
Frequently Asked Questions
What is a Quality of Earnings (QoE) report?
A Quality of Earnings (QoE) report is a deep financial analysis conducted by an independent accounting firm during a potential sale, providing a comprehensive diagnostic of a practice’s financial health beyond the standard profit and loss statement.
Why is a QoE report important for physician-owned practices?
A QoE report is important for physician-owned practices because it assures buyers of the stability and sustainability of the practice’s earnings, enabling sellers to potentially achieve a premium valuation by presenting a reliable predictor of future performance.
How does a QoE report adjust EBITDA?
The QoE report adjusts EBITDA by accounting for one-time events, owner-specific expenses, or accounting anomalies to present a ‘normalized’ view of the practice’s ongoing profitability, giving buyers a clearer understanding of true earnings.
Can you give an example of how a QoE report works in healthcare M&A?
Yes. For example, if Dr. Allen pays himself a salary below the market rate, the QoE report will add back the underpaid amount and subtract the market-appropriate salary. This normalization alters the EBITDA, providing a more accurate basis for valuation.
What related financial terms are important to understand alongside QoE?
Important related terms include Adjusted EBITDA, Due Diligence, and Net Working Capital, all of which are essential for comprehending the financial health and valuation process of a healthcare practice.