Diligence
Quality of earnings (QoE)
A quality of earnings report is an accounting firm's independent test of whether your reported profit is real and repeatable. It is the piece of diligence that most often moves a deal, because what it strikes out reduces what you can borrow.
Also called QoE report · financial due diligence · FDD · vendor due diligence · earnings quality
Diligence is often the largest line after the arrangement fee, and the range across deals is wide.
| Scope | Indicative cost |
|---|---|
| Clean refinancing | Low tens of thousands |
| Financial DD only | The usual core |
| Financial plus legal | 38–68 on the scale |
| Full suite with commercial | Well over £100k |
Range from the all-in-cost guide: a few tens of thousands to well over £100,000 on a deal needing the full suite.
What the report is testing
A quality of earnings report is an accounting firm's independent examination of whether reported profit is real, sustainable and repeatable. It is not an audit and it does not give an opinion on the accounts. It answers a narrower question: if a lender lends against this earnings figure, is the figure sound?
Four workstreams do most of the work. Tying the trial balance to the statutory accounts, which is routine. Testing revenue recognition and period cut-off, which occasionally surfaces something. Normalising working capital to establish what the business really needs to fund itself. And testing the EBITDA adjustments one at a time, which is where most findings land.
That last workstream is the one that matters commercially, because it is where the borrower's incentive to present a large number and the evidence available to support it diverge most.
Why it moves the deal
Financial due diligence is the piece that most often changes a transaction, and the mechanism is simple arithmetic. Facility size is broadly earnings multiplied by the leverage a lender will underwrite, so an adjustment struck out reduces capacity by the multiple.
At 3.0 times, £200,000 of rejected add-backs removes £600,000 of facility. At the top of the bank senior band it is £700,000. Nothing about the business has changed; only the number the lender is lending against.
That is why a report delivered late in a process is disruptive out of proportion to its size. A borrower who has agreed a structure on an assumed EBITDA and then loses two adjustments in week eight is not negotiating a detail, they are re-sizing the transaction, often after exclusivity has been granted and the alternatives have gone.
What the report strikes out is what you cannot borrow. At 3x, £200k of rejected adjustments is £600k of facility.
| Leverage | Facility lost |
|---|---|
| At 2.5x | £500k |
| At 3.0x | £600k |
| At 3.5x | £700k |
Multiplier at 3x, extended across the bank senior 2.5-3.5x band. Derived arithmetic.
What it costs and who pays
Diligence is often the largest single line after the arrangement fee, and the borrower pays for the lender's as well as any of their own. That surprises people the first time.
On a lower-mid-market raise the range is wide. A straightforward refinancing with clean, current numbers can sit in the low tens of thousands. A deal needing the full suite, financial plus legal and sometimes commercial diligence on the market and your position, runs well over £100,000.
Where you land in that range is substantially within your control. A clean, well-prepared borrower with current numbers keeps the bill down. A messy data room invites the lender to dig, and you pay for the digging, both in fees and in the weeks it adds.
Vendor-commissioned against lender-commissioned
The same exercise can be run two ways, and the difference is worth understanding before deciding.
Lender-commissioned is the default: the lender appoints the firm, sets the scope, and you pay. You see the findings when they land, and by then they are the lender's findings. Vendor-commissioned means you appoint the firm, usually before going to market, and the report goes out with the pack, typically with reliance available to the eventual lender.
Vendor-commissioned costs money before you know whether the raise will happen, which is the real objection to it. What it buys is control of timing and the chance to fix problems before anyone else sees them. If an adjustment will not survive, you would rather know in week minus two, when you can drop it and re-plan, than in week eight when it re-sizes an agreed deal.
The report tests four things, and they are not equally likely to produce a problem.
| Workstream | Likelihood |
|---|---|
| Trial balance to statutory | Routine |
| Revenue recognition | 20–45 on the scale |
| Working capital normalisation | 42–68 on the scale |
| EBITDA adjustments | Most findings |
Relative likelihood of a finding by workstream. Illustrative market convention, not measured data.
When it is worth commissioning your own
Not always, and the honest test is about complexity rather than size.
It earns its place where the earnings story is complicated: a business with several acquisitions in the period, significant owner adjustments, a recent change in accounting treatment, or lumpy contract revenue where cut-off is material. It also earns its place where the timetable is fixed, such as an acquisition with a completion date, because it removes the workstream most likely to slip.
It is harder to justify on a straightforward refinancing of a stable business with clean accounts and few adjustments. There, the lender's own diligence will be quick and cheap because there is little to find, and paying twice for the same conclusion is not obviously wise.
What the report tests
The preparation that reduces both the bill and the findings is the same preparation.
Have current management accounts, monthly, reconciled to the last statutory year end. An EBITDA bridge with evidence attached to each line, and the unsupportable adjustments already dropped, is what the report is testing against before anyone else tests them. A working capital analysis showing the monthly swing across at least two years is expected, as is the aged debtor and creditor listings, the customer concentration schedule, and the contract register ready before they are asked for.
The single biggest lever is dropping weak adjustments in advance. A bridge with six evidenced lines is worth more than one with twelve where four are struck, because the strikes cast doubt on the survivors, and every hour the diligence team spends investigating a line you were always going to lose is an hour you are paying for.
Reading the findings
A report rarely says yes or no. It produces a set of adjustments the firm supports, a set it does not, and a set it flags as matters for the lender's judgement. The third category is where the conversation happens.
Where an adjustment is rejected, ask on what basis. A finding that an add-back lacks documentary support is fixable if the document exists and was not provided. A finding that a cost recurs each year in a different form is not fixable, and arguing it damages credibility on the adjustments that survived.
Where the report reduces EBITDA materially, the useful response is to re-run the structure at the new figure before the lender does, and to arrive at the next meeting with a revised proposal rather than an objection. That converts a problem into a decision, which is a considerably better position to negotiate from.
Common questions
What is a quality of earnings report?
An accounting firm's independent test of whether reported profit is real, sustainable and repeatable. It is not an audit and gives no opinion on the accounts. It ties the trial balance to the statutory numbers, tests revenue recognition and cut-off, normalises working capital, and examines each EBITDA adjustment on its own evidence.
How much does financial due diligence cost?
On a UK lower-mid-market raise it runs from a few tens of thousands on a clean refinancing to well over £100,000 where the full suite of financial, legal and commercial diligence is needed. It is often the largest single line after the arrangement fee, and the borrower pays for the lender's diligence as well as any of their own.
Why does a QoE report matter so much?
Because facility size is broadly earnings multiplied by the leverage the lender will underwrite. At 3.0 times, £200,000 of rejected adjustments removes £600,000 of borrowing capacity. Nothing about the business changes; only the number the lender lends against, which is why financial diligence is the workstream that most often moves a deal.
Should I commission my own QoE before going to market?
It depends on complexity rather than size. It earns its place where the earnings story is complicated, several acquisitions in the period, significant owner adjustments, lumpy contract revenue, or where the completion date is fixed. It is harder to justify on a straightforward refinancing of a stable business with few adjustments.
What is the difference between vendor and lender due diligence?
Lender-commissioned is the default: they appoint the firm, set the scope, you pay, and you see the findings when they land. Vendor-commissioned means you appoint the firm before going to market and the report goes out with the pack, usually with reliance available to the eventual lender. The second costs money earlier but buys control of timing and the chance to fix problems privately.
How do I keep the diligence bill down?
Be prepared. Current monthly management accounts reconciled to the last year end, an evidenced EBITDA bridge, a two-year working capital analysis, aged debtor and creditor listings and a customer concentration schedule, all ready before they are asked for. A messy data room invites the lender to dig, and you pay for the digging in both fees and weeks.
What happens if the report rejects my add-backs?
Ask on what basis. A finding that an adjustment lacks documentary support is fixable if the document exists and simply was not provided. A finding that a cost recurs each year in a different form is not, and arguing it damages credibility on the adjustments that survived. Where EBITDA falls materially, re-run the structure at the new figure yourself and arrive with a revised proposal rather than an objection.
Is a QoE report the same as an audit?
No. An audit gives an opinion on whether the statutory accounts show a true and fair view. A quality of earnings report answers a narrower and more commercial question: whether the earnings figure a lender is being asked to lend against is sound, sustainable and supported by evidence.
The full treatment sits in the guide: what lenders look for in your accounts.
This page explains a term as it is used in the UK lower-mid-market. It is general information, not advice on any particular facility. Terms vary between lenders and between deals, and the drafting in your own agreement governs.