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Buy-Side Quality of Earnings: Why It Matters and How to Get It Right

Sikich

Oct 7 2025

3 min read

Not all earnings are created equal. Sometimes the numbers reflect long-term, loyal customers and sustainable performance. Other times… well, it’s more smoke and mirrors than substance. That’s where a Quality of Earnings (QofE) report comes in—to serve as a spotlight that cuts through the shadows of the financial statements and shows the truth behind the numbers.

Because when you get down to it, financial statements—even audited ones—only tell you what the numbers are. A QofE report tells you what the numbers actually mean.

The Role of QofE in Buy-Side Due Diligence

Buying a company is like buying a house or a vintage car—you should get a thorough inspection before closing the deal. For mergers and acquisitions (M&A), that inspection is a QofE. A QofE evaluates the quality of the company’s earnings, the sustainability of its cash flow, and its working capital in a manner that is unbiased, factual, and brutally honest. A QofE identifies flukes that have been disguised as trends, skeletons in the closet and a wide variety of other issues so you can rest assured that you haven’t mistaken a fixer-upper for a dream investment.

Picking the Right Deliverable

QofE isn’t one-size-fits-all. The best approach depends on the size of the deal, your timeline and how deep you need to dig. Here are the main approaches:

Databook: A quick snapshot of the target’s financials. Perfect if you just want the highlights.

QofE “Light” or Red Flag Report: The middle ground. A cost-effective way to spot risks and opportunities without going fully in depth. Great when speed and budget matter.

Full QofE Report: The gold standard. A full QofE report provides a deep dive into earnings, expenses, revenue recognition, and performance. It removes noise such as non-recurring transactions, delivers normalized results and gives you confidence that the financial information you’re seeing is sustainable—not just lucky timing.

Why Invest in a QofE?

A QofE gives you something management’s financials can’t: clarity. A strong QofE helps you:

Validate earnings and cash flow sustainability

Uncover risks before they tank your deal

Strengthen your negotiating position

Align your investment thesis with reality

Why Use Sikich?

Not every deal makes it across the finish line—and that can be a good thing. Our Transaction Advisory team has seen firsthand how the right diligence can change outcomes. Sometimes that means validating earnings and giving buyers the confidence to move forward. Other times, it means uncovering revenue or pipeline issues that would have derailed the investment later. Either way, our clients avoid costly mistakes and walk away knowing that they’ve gotten the full picture.

What sets Sikich apart? Senior-level involvement, disciplined processes and a commitment to providing our clients with the information that really matters. We don’t just deliver a report—we provide actionable insights that influence negotiations, reshape investment theses, and, in some cases, stop bad deals from moving forward.

If you’re making an acquisition, you can’t afford to gamble on surface-level numbers. You need advisors who know what to look for and will hand you the truth, unvarnished. That’s what we do.

Bottom line: When the stakes are high, you want Sikich on your side.

This publication contains general information only and Sikich is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or any other professional advice or services. This publication is not a substitute for such professional advice or services, nor should you use it as a basis for any decision, action or omission that may affect you or your business. Before making any decision, taking any action or omitting an action that may affect you or your business, you should consult a qualified professional advisor. In addition, this publication may contain certain content generated by an artificial intelligence (AI) language model. You acknowledge that Sikich shall not be responsible for any loss sustained by you or any person who relies on this publication.

About the Author

Sikich

Sikich is a global company specializing in technology-enabled professional services. With more than 1,900 employees, Sikich draws on a diverse portfolio of technology solutions to deliver transformative digital strategies and is comprised of one of the largest CPA firms in the United States. From corporations and not-for-profits to state and local governments and federal agencies, Sikich clients utilize a broad spectrum of services* and products to help them improve performance and achieve long-term, strategic goals. *Securities offered through Sikich Corporate Finance LLC, member FINRA/SIPC. Investment advisory services offered through Sikich Financial, an SEC Registered Investment Advisor. 