How is a quality of earnings report different from a business valuation?

The two documents are often mixed up because both involve accountants and both end in numbers. They answer different questions. A quality of earnings report asks whether the earnings on the page are real. A valuation is a separate document that takes earnings as one input among several. Knowing which one you are holding keeps you from using it for the wrong job.

What each one tests

A quality of earnings report works on the past. It tests records, adjustments, revenue timing and working capital, and reports what it found. A valuation looks forward as well. It applies a method, assumptions about risk and growth, and market evidence, then states an opinion. The report gives findings and evidence, not a price, and Deavo does not offer either.

Who commissions each

Buyers and sellers each commission quality of earnings work, usually through an accountant. A valuation may be requested by an owner planning a sale, by a lender, by a court or tax authority, or by the parties to a shareholder dispute. Each engagement letter says who may rely on the work, so read it before you share the document with others.

Where each sits in the timeline

A seller who wants to understand the business may seek a valuation before listing. A buyer’s quality of earnings work usually follows a signed letter of intent, during due diligence. A valuator can rely on tested earnings when they exist, but needs to say so and take responsibility for how the figures are used.

Using them together

If both exist, read the valuation’s earnings inputs against the quality of earnings findings, and ask the professionals to explain any gap. Neither replaces your own judgment or your advisers’ advice, and a qualified valuator is the person to ask about value.