A Rule of Three: Improve Your Quality of Earnings

In today’s competitive and constantly evolving business environment, understanding how to prepare a business for sale is more important than ever. A critical part of this process is ensuring that your financials are clear, accurate, and compelling.

One of the most valuable tools in this regard is the Quality of Earnings (QoE) report. These reports go far beyond basic financial statements, offering an in-depth look at the true health of your business’s profitability. They help separate regular income from one-time gains or accounting errors. This makes them important for anyone valuing a business or considering a company’s worth.

If you’re assessing your business’s readiness for a potential sale or investment, assessing your Quality of Earnings should be a top priority. Want to see where you stand? Use our Investment Banking Support Tool to realize and receive the value your business deserves.

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They’re built with purpose, clarity, and a plan that turns vision into action. That’s what OneAccord delivers: a tailored path to help your business grow, scale, or exit with confidence.

Whether you’re navigating stalled growth, operational challenges, or preparing for a sale, our proven process provides the structure, leadership, and hands-on execution you need to move forward.

Quality of Earnings (QoE) is a detailed check of how healthy your business’s finances are. Unlike regular financial reports that show what your business earned and spent, QoE looks closer to find out where the real profits come from and if they are trustworthy. It helps you see if your earnings come from normal, everyday business activities or if they are boosted by one-time events, seasonal changes, or accounting tricks.

A good QoE analysis gives a clear picture of your business’s true earnings—what is called normalized earnings. This process removes any unusual fluctuations or errors, so potential buyers and investors can see the real value of your business. It shows your core cash flow and how well your business is actually doing day-to-day.

Quality of Earnings is an important part of company valuation methods and helps determine how much your business is really worth. If you’re thinking about how to prepare a business for sale, understanding and improving your QoE can make your business more attractive to buyers. A strong QoE shows that your business is stable, profitable, and ready for a successful sale.

Not sure if your earnings are ready for scrutiny? Use our investment readiness tool.

QoE reports are essential tools that investment banks rely on during the process of valuing a business, negotiating deals, and structuring transactions. A well-prepared QoE report provides critical insights that can make or break a deal. A strong QoE report can:

• Enhance Credibility: It assures buyers and investors that the presented financials are reliable, reducing perceived risks.
• Aid in Pricing: By isolating sustainable earnings, investment banks can establish a realistic valuation and avoid overpaying for non-recurring profits.
• Streamline Transactions: A clear financial picture fosters trust, speeding up negotiations and due diligence.

Without a thorough QoE, transactions may be delayed or collapse due to unforeseen discrepancies, which can cost time and reputation.

Learn how we guide clients through this process with Strategic Planning Services.

Business owners often focus on revenue growth and net profit, neglecting the quality and sustainability of those earnings. Some common oversights include:

• Weak Internal Controls — Inaccurate financial data due to loose accounting practices can erode confidence during due diligence.
• Dependence on Key Customers — A heavy reliance on a few clients makes earnings vulnerable to disruption.
• Non-Recurring Revenue — Owners may overestimate the value of one-time gains like large contracts, neglecting their impact on normalized earnings.

These blind spots can significantly reduce perceived value in the eyes of potential buyers or investors.

When buyers or investors look at your business, they focus on several key areas that reveal the true health of your financials:

• Revenue Stability: Is your revenue diversified across multiple clients or dependent on a few? Consistent revenue streams are more appealing.
• Profitability Consistency: Are your profits steady, or do they fluctuate due to seasonal or cyclical factors? Stable profits command higher valuations.
• Cash Flow Sustainability: Do your profits reliably convert into cash? Or are they tied up in receivables, inventory, or other non-cash items? Clear cash flow signals stability.
• Expense Control: Are your operating costs predictable? Are there hidden liabilities, like legal issues or deferred maintenance? Transparent, controlled expenses increase confidence.
• Company Valuation Methods: Buyers look at different ways to value a company. They use methods like EBITDA multiples, discounted cash flow, or asset-based approaches. These help them find the fair value of your business.

Understanding these factors will help you prepare your business for sale and maximize your valuation.

If you’re preparing your business for a potential sale or investment, here are three proactive steps to enhance your QoE:

1. Tighten Financial Reporting — Invest in robust accounting systems and ensure all your financial data is accurate, current, and transparent. Work with a professional—like a CFO or accountant—to implement internal controls, improve reporting, and eliminate discrepancies. Presenting a clear, reliable financial picture boosts confidence and increases your business’s valuation.
2. Normalize Your Earnings — Find and adjust for income or expenses that do not happen regularly. This includes big one-time sales, unusual costs, or seasonal changes. Creating a normalized earnings figure shows how well your business can make money. This helps buyers understand its long-term value.
3. Diversify Revenue Streams — Reduce reliance on a limited number of clients or revenue sources. Developing multiple, stable income streams shows buyers that your business is resilient and less vulnerable to market shifts. This diversification makes your business more appealing. It also helps you get a higher value when you sell.

“Working with OneAccord was a transformative experience for Synergy Health Partners. Under their Partner’s leadership, we restructured our ASCs, significantly improving our utilization from 46% to 62% and reducing our staff per case from 24.6 to 13.4.

SHP has strategic plans. OA has led efforts to improve our ASC operations and scheduling. These actions led to a 25% increase in our revenue over the past year. We also saw an 86% rise in TTM EBITDA.”

—First Aid Only, a former OneAccord client

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