Quality of Earnings Reports for Home Services: What They Are, When You Need One, and What They Reveal

If you are buying or selling a home services business above $2M to $3M in enterprise value, someone is going to commission a quality of earnings report. If you are the buyer, you should be the one commissioning it. If you are the seller, you should understand exactly what it will find — ideally before the buyer does.

A quality of earnings report is the single most important piece of financial due diligence in any acquisition. It is not an audit. It is not a tax return review. It is an independent, forensic analysis of what a business actually earns on a normalized, sustainable basis. And in home services, where the gap between stated earnings and real earnings is routinely 20 to 40 percent, it is the document that makes or breaks deals.

This guide covers what a QoE report actually does, why it matters more in the trades than in most industries, and how to prepare for one whether you are buying or selling.

What a Quality of Earnings Report Actually Is

A quality of earnings report is commissioned by either the buyer or the seller and prepared by an independent accounting firm — usually a mid-market advisory firm that specializes in transaction diligence, not your regular CPA.

The QoE firm takes the seller’s financial statements, tax returns, bank statements, and operational data, and answers one question: what does this business actually earn on a repeatable, normalized basis? They are not checking whether the books comply with GAAP. They are determining whether the EBITDA the seller is claiming is real, sustainable, and free of one-time items, inflated add-backs, or accounting treatments that overstate profitability.

The output is a detailed report — typically 30 to 60 pages — that includes adjusted EBITDA, a bridge from reported to adjusted earnings, a revenue quality analysis, a working capital analysis, and a risk summary. This report becomes the foundation for the purchase price negotiation. If the QoE says adjusted EBITDA is $400K and the seller was claiming $600K, the deal either reprices or dies.

For context on how EBITDA multiples work in the trades, see our guide on valuation multiples for home services businesses.

Why QoE Reports Matter More in Home Services

In theory, every acquisition should include a quality of earnings analysis. In practice, QoE reports are especially critical in home services because of how contractors typically manage their finances.

Most contractors have books that do not reconcile to reality. A majority of home services companies in the $500K to $5M revenue range run cash-basis books that do not tie to their bank accounts. Their stated EBITDA has no verifiable relationship to actual cash flow. We see this constantly in our client work — the P&L says one thing, the bank account says another, and there is no clean bridge between the two. A QoE firm will catch this immediately by pulling bank statements and comparing deposits to reported revenue line by line.

Owner add-backs are rampant and often inflated. Every seller presents their EBITDA with add-backs — the owner’s above-market salary, the truck the spouse drives, the family cell phone plan, the hunting trip expensed as a business retreat. Some of these are legitimate. Many are not. The QoE firm’s job is to stress-test every single add-back and determine which ones a buyer should accept. In our experience, owner add-backs are the single biggest source of bid-ask spread blowups in home services deals. The seller says adjusted EBITDA is $800K. The QoE comes back and says it is $550K. That delta kills deals.

ServiceTitan and field service data often does not match the books. This is a problem unique to service businesses. The contractor’s dispatch software — ServiceTitan, Housecall Pro, or whatever they use — tracks jobs, invoices, and payments. QuickBooks tracks the accounting. In theory, these should reconcile. In practice, they almost never do. Payments marked as collected in ServiceTitan may not have actually hit the bank account, especially when third-party financing and payment processing are involved. ServiceTitan has no native mechanism to confirm that the money marked as paid on an invoice was actually received. A QoE firm that understands home services will check this reconciliation — and the discrepancies they find can be significant.

Revenue quality is harder to assess. Prepaid maintenance agreements recognized upfront inflate current-period revenue. Seasonal lumping makes trailing twelve-month EBITDA misleading depending on when you take the snapshot. Cash jobs that never hit the books create unreported revenue that the seller may try to claim as an add-back — which is both a red flag and a tax issue. The QoE firm normalizes all of this to show what the business earns on a sustainable, recurring basis.

Labor classification is a hidden liability. Many home services companies have 1099 workers who should be classified as W-2 employees. This creates exposure — back taxes, penalties, workers’ comp liability — that the QoE firm will identify and quantify. It does not kill the deal on its own, but it affects the risk profile and often results in a holdback or escrow at close to protect the buyer.

When You Need a Quality of Earnings Report

You are buying a business over $500K. Always commission a buy-side QoE. The cost — typically $20K to $50K — is trivial compared to the risk of overpaying by $200K or more on a deal where the seller’s financials do not hold up. Think of it as insurance on the purchase price.

You are selling and want to control the narrative. A sell-side QoE — commissioned by the seller before going to market — lets you identify and fix problems before a buyer’s QoE firm finds them. It also signals to buyers that you are a serious, organized seller, which can accelerate the deal timeline and reduce the discount buyers apply for perceived risk. Sell-side QoE reports cost more ($30K to $75K) because the scope is broader, but they often pay for themselves by preventing price reductions during due diligence.

A PE firm is acquiring you. Private equity firms commission QoE reports on every single deal. This is non-negotiable. If you are being acquired by PE, a QoE is happening whether you want one or not. The question is whether you have prepared for what it will find. For more on how PE approaches home services acquisitions, see our guide to private equity in home services.

You are doing a partner buyout or ownership transition. Any transaction where one owner is buying out another should include a QoE or QoE-lite analysis. The valuation needs to be based on real earnings, not what the QuickBooks P&L says.

When you probably do not need one: Very small asset purchases under $500K where you are buying a customer list, a phone number, and some trucks from a retiring owner. At that size, a thorough bank statement analysis and your own financial review are sufficient — pull bank statements, compare deposits to reported revenue, and verify the big-ticket add-backs independently. The cost of a formal QoE would be disproportionate to the deal size. For more on what to check on smaller deals, see our due diligence guide for home services acquisitions.

What the QoE Firm Actually Analyzes

A thorough QoE engagement covers six core areas.

EBITDA normalization. The firm starts with reported EBITDA and adjusts for one-time items (a lawsuit settlement, a roof replacement on the shop, a one-time equipment purchase), owner add-backs (above-market compensation, personal expenses run through the business), and non-recurring revenue or expenses. The goal is to arrive at a run-rate EBITDA that represents what the business earns in a normal year under professional management.

Revenue quality analysis. Not all revenue is equal. The QoE firm breaks revenue into recurring versus one-time, analyzes customer concentration (if 30 percent of revenue comes from one customer, that is a risk), examines seasonality patterns, and determines whether revenue trends are sustainable. A business showing 20 percent revenue growth driven by a single large commercial contract is very different from one showing 20 percent growth across a diversified residential customer base.

Cost structure validation. Are costs properly categorized? Are there hidden liabilities — warranty obligations, deferred revenue from prepaid maintenance agreements, pending litigation, unrecorded tax liabilities? Are labor costs properly classified (1099 versus W-2), and if not, what is the potential exposure from misclassification? These findings can materially change the risk profile of the deal.

Bank reconciliation and cash flow bridge. This is where QoE firms earn their fee in home services. They pull 12 to 24 months of bank statements and reconcile deposits to reported revenue and disbursements to reported expenses. In the trades, this exercise almost always reveals discrepancies — because the books were never reconciled to the bank in the first place. At minimum, every buyer should be doing this exercise even on small deals where a formal QoE is not warranted.

Working capital analysis. The QoE firm determines how much working capital the business needs to operate normally. This matters because the purchase price typically assumes a normal level of working capital is included. If the seller has been starving the business of working capital to inflate cash — deferring vendor payments, running inventory lean, collecting aggressively — the buyer may need to inject capital post-close just to keep the business running.

Risk identification. Customer concentration, key-person dependency, regulatory exposure, pending legal issues, labor market risks, technology dependencies. The QoE report flags anything that could impair the business’s ability to generate the adjusted EBITDA on a go-forward basis.

What They Typically Find in Home Services Companies

After working on the buy side of home services transactions, here is what we see QoE firms flag most frequently.

Stated EBITDA is almost always different from adjusted EBITDA. It would be unusual for a QoE report to confirm the seller’s stated EBITDA exactly. The direction and magnitude of the adjustment varies, but expect adjustments — up or down — of 15 to 40 percent from what the seller initially presented.

Cash-basis to accrual adjustments change the picture significantly. Most contractors run cash-basis books. A QoE firm converts to accrual and the numbers shift — sometimes dramatically. Revenue recognized when cash hits the bank is different from revenue recognized when the work is performed. The accrual-adjusted P&L is what the buyer prices the deal on, and it often tells a different story than the cash-basis reports the seller has been looking at for years. For a deeper dive on reading a contractor’s P&L, see our P&L analysis guide for home services.

Owner add-backs that do not hold up. This is the most contentious finding and the one that blows up the most deals. The seller genuinely believes their add-backs are legitimate. The QoE firm disagrees on some of them. Common rejections: owner compensation add-backs where the replacement cost is higher than the seller assumed, personal expenses run through the business that lack documentation, and “one-time” expenses that actually recur every year. The resulting gap between claimed and accepted add-backs is where the bid-ask spread widens — and where deals either reprice or fall apart.

Revenue leakage between field software and the books. ServiceTitan invoices and QuickBooks records frequently do not tie. The QoE firm finds revenue booked in one system but not the other, payment discrepancies from third-party financing processors, and reconciliation gaps that the contractor never addressed because they were not looking. This is one of the most common and most frustrating findings for sellers, because it is a problem they did not know they had.

Market trends weakening during the deal process. This is more common than you would expect. The business is performing well when the LOI is signed, but by the time the QoE is complete two to three months later, revenue and margins have softened. Sometimes this is because the owner has mentally checked out — already thinking about life after the sale rather than running the business with the same intensity. Sometimes it is genuine market softness. Either way, the QoE firm captures trailing performance in real time, and a declining trend during diligence is a major red flag for buyers.

Labor risk. In the skilled trades, the team is the business. If word gets out about an exit, technicians may leave — and labor in the trades is extremely competitive right now. The QoE firm assesses whether the business has employment agreements, retention incentives, and a team structure that survives a change in ownership. If key technicians could walk at any time with no non-compete or retention plan, that is a material risk that directly affects how much a buyer is willing to pay.

How Much a QoE Costs and Whether It Is Worth It

Buy-side QoE reports typically cost $20K to $50K depending on the size and complexity of the target. Sell-side QoE reports run $30K to $75K because the scope is broader — the sell-side firm is also advising on presentation and positioning, not just analysis.

The timeline is typically three to six weeks from engagement to final report, assuming the seller has their documentation reasonably organized. If the seller’s records are a mess — which in home services they often are — the timeline stretches because the QoE firm spends more time chasing down source documents and reconciling discrepancies.

Is it worth it? The math is straightforward. If a QoE report costs $35K and prevents you from overpaying by $150K on a deal where the seller’s EBITDA was inflated by questionable add-backs, the ROI is immediate and obvious. If you are selling and a $50K sell-side QoE helps you close at a higher valuation because you identified and fixed problems before the buyer found them, it pays for itself several times over.

The only scenario where a QoE is not worth the cost is a very small deal — under $500K — where the formal process would represent 7 to 10 percent of the transaction value. At that size, do your own diligence: pull bank statements, compare deposits to reported revenue, verify the big-ticket add-backs independently, and check whether the ServiceTitan data ties to the books.

How to Prepare If You Are the Seller

If you know a QoE is coming — and if you are selling a business worth more than $1M, it is — you want to be prepared. The sellers who fare best in QoE are the ones who have clean, organized, defensible financials. Here is what that looks like.

Get on accrual-basis accounting. If you are still running cash-basis books, convert to accrual at least 12 months before you go to market. The QoE firm will convert your books to accrual anyway — you want to control that conversion rather than having a buyer’s accountant do it for you and find surprises.

Make sure your books reconcile to the bank. This is the single most important preparation step. Every dollar of revenue on your P&L should trace to a bank deposit. Every expense should trace to a disbursement. If your accountant has not been doing monthly bank reconciliations, fix this immediately. It is the first thing every QoE firm checks.

Document every owner add-back with proof. If you are adding back your above-market salary, have a market compensation study or job posting data that shows what a replacement would cost. If you are adding back a personal vehicle, have the records showing it is personal. Undocumented add-backs get rejected. Be conservative and accurate — it is better to claim less and have it accepted than to claim aggressively and have the QoE firm strip it out, which damages your credibility on everything else.

Clean up your ServiceTitan data. Make sure invoices in ServiceTitan tie to revenue in QuickBooks. Reconcile third-party financing payments — GreenSky, Synchrony, Wisetack, whoever you use — to actual bank deposits. Fix miscategorized jobs, update incomplete records, and close open invoices. The QoE firm will pull data from your dispatch system, and it needs to tell the same story as your books.

Have employment agreements ready. If your key technicians and managers do not have written employment agreements, that is a finding the QoE firm will flag as labor risk. Get agreements in place — with non-competes or non-solicitation clauses where appropriate — before the process starts.

Know your KPIs. Average ticket size, job volumes, close rates, customer acquisition cost, technician productivity — the metrics that drive your business. A seller who can articulate these numbers confidently signals to buyers and QoE firms that they understand their business at a granular level. A seller who cannot answer basic operational questions creates uncertainty — and uncertainty always gets priced into the deal as a discount.

The best time to start preparing for a QoE is 12 to 18 months before you plan to sell. That gives you time to clean up the books, implement proper systems, document your add-backs, and run the business in a way that creates a clean, defensible financial record. For a step-by-step timeline, see our guide on preparing your home services business for exit.

Or start with our free Margin Diagnostic Calculator to see where your profitability stands today.

Related: due diligence guide for home services acquisitions, valuation multiples for home services businesses, how to acquire a competitor in home services

About the Author

Raymond Gong

Raymond Gong is the founder and managing partner of Profitability Partners, a fractional CFO and bookkeeping firm serving small to mid-sized businesses nationwide. With expertise spanning financial reporting, cash flow management, tax planning, and ServiceTitan accounting integration, Raymond helps home services companies, startups, and growing businesses build the financial infrastructure they need to scale confidently. He specializes in translating complex financial data into clear, actionable insights — so owners can make smarter decisions about growth, profitability, and exit planning. Based in Tampa, FL, Raymond works with clients across HVAC, plumbing, electrical, and roofing to optimize their books, streamline reporting, and prepare for what's next.

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Raymond Gong

Raymond Gong is the founder and managing partner of Profitability Partners, a fractional CFO and bookkeeping firm serving small to mid-sized businesses nationwide. With expertise spanning financial reporting, cash flow management, tax planning, and ServiceTitan accounting integration, Raymond helps home services companies, startups, and growing businesses build the financial infrastructure they need to scale confidently. He specializes in translating complex financial data into clear, actionable insights — so owners can make smarter decisions about growth, profitability, and exit planning. Based in Tampa, FL, Raymond works with clients across HVAC, plumbing, electrical, and roofing to optimize their books, streamline reporting, and prepare for what's next.