Buyers came back in force. Global M&A rose 40% to $4.9 trillion in 2025, the second-highest deal value on record, and 80% of M&A executives expect activity to hold or increase through 2026. For technology founders, that headline hides the detail that matters most: the quality of earnings in tech M&A now decides who captures that demand. Capital is concentrating around businesses that can prove their numbers, and earnings quality has become the first filter every serious buyer applies.
A quality of earnings report (QoE) is how sellers pass that filter before a buyer ever asks. It is an independent analysis of whether your reported profits are real, recurring, and sustainable, and it has quietly become the document that separates deals that close at the headline price from deals that get repriced in diligence. This guide covers what a QoE examines, how technology businesses are valued in 2026, which metrics move multiples up or down, what the process looks like for sellers, and what happens to earnings quality after the deal closes. We work from live market data throughout, because the 2026 environment rewards preparation more than any market we have advised in.
What Is a Quality of Earnings Report?
A quality of earnings report is an independent, third-party analysis of a company's financial performance that tests the sustainability, predictability, and cash-generating nature of its earnings. Grant Thornton's framing is a useful anchor: the objective is to determine the level of sustainable earnings a buyer could expect on a standalone basis after the transaction, not simply to confirm that historical statements were recorded correctly.
In practice, the analysis starts with reported earnings and works toward a normalized figure, usually adjusted EBITDA. The analyst strips out one-time items, corrects owner-related expenses to market rates, tests how revenue is recognized, and reconciles the whole picture against bank statements. The output is an earnings number a buyer can underwrite: what the business actually produces, month after month, once the noise is removed.
QoE vs. audit vs. valuation
Sellers often confuse the three. An audit gives an opinion on whether financial statements comply with accounting standards. A valuation estimates what the business is worth. A quality of earnings analysis answers a different question: are the earnings behind that valuation real and repeatable? A business can hold a clean audit and still carry weak earnings quality, because perfectly compliant statements can include revenue that will not recur or expenses that understate the true cost of running the company. The QoE is the document built specifically for the deal table, which is why buyers weight it so heavily during negotiations.
Why earnings quality carries so much weight in technology mergers
The importance of earnings quality in technology mergers comes down to what the buyer is actually purchasing. In a tech deal, the asset is a stream of future revenue, and the price is a multiple applied to a single earnings figure. Move that figure by 10% and the enterprise value moves by 10%, before a word of negotiation. Earnings quality is the evidence layer under that figure: it tells the buyer how much of the reported number is durable, how much is noise, and how confidently the multiple can be applied. High earnings quality means stable, recurring profits from core operations. Low earnings quality means one-time items, aggressive recognition, or trends that will not repeat. Buyers price the difference, every time.
A quality of earnings report answers the only question a buyer really has: if I own this business tomorrow, what will it actually earn?
Why Earnings Quality Decides Tech M&A Outcomes in 2026
Technology is where the capital is flowing. Tech M&A jumped 77% in 2025, driven by AI-related deals such as Alphabet's $32 billion purchase of Wiz and Palo Alto Networks' $25 billion acquisition of CyberArk. The momentum carried into this year: technology deal values rose 67% to $420 billion in the first five months of 2026, and technology accounted for 89% of all TMT deal value. Private capital tells the same story. PE deal value climbed 57% to $905 billion in 2025, and 80% of general partners expect acquisition activity to increase this year.
The other half of the story is how that capital gets deployed. Buyers are pairing bigger budgets with sharper underwriting. EY's Q1 2026 Private Equity Pulse found that around 60% of general partners are increasing diligence on AI disruption risk, and capital is concentrating around higher-quality opportunities. Bain's survey of more than 300 M&A executives shows AI adoption in dealmaking doubled to 45% in 2025, and one in five strategic dealmakers walked away from a deal because of AI's anticipated impact on the target. Buyers now analyze more data, faster, and with fewer blind spots than at any point in M&A history.
For a well-prepared seller, this is the best environment in years. Selective buyers pay up for businesses that clear their bar, and the bar is defined almost entirely by earnings quality. The research behind buyer caution is decades deep: Harvard Business Review's analysis of the acquisition track record puts the failure rate of M&A between 70% and 90%, and a 2026 MIT Sloan Management Review study of S&P 500 deals found 46% are eventually undone. Buyers know these numbers, which is why they scrutinize earnings so hard. Sellers who arrive with independently verified earnings turn that scrutiny into an advantage: their numbers hold, their process moves faster, and their offers stick.
Our own transaction data makes the same case from the advisory side. FE International runs pre-listing diligence on every engagement and turns down over 90% of the businesses that approach it, which is a core reason 94.1% of FE-listed businesses close successfully. Verification before market is not overhead. It is the mechanism that converts buyer interest into completed deals.
In 2026, buyers have more capital and better tools than ever. Both flow toward the sellers whose earnings survive inspection.
How Tech Businesses Are Valued: SDE, EBITDA, and Revenue Multiples
Before a QoE can protect your valuation, you need to know which earnings metric your valuation is built on. Technology businesses are valued using three primary methods, and FE International's valuation framework, built across 1,500+ completed transactions, maps them to business profile rather than preference.
SDE multiples apply to owner-operated businesses, typically those valued under roughly $5 million. Seller's discretionary earnings start with profit and add back the owner's salary and discretionary expenses, because a new owner-operator captures those dollars. The multiple then reflects growth, transferability, and risk.
EBITDA multiples take over as businesses grow past roughly $5 million in value and run with management teams in place. Owner compensation gets normalized to market rates rather than added back, and buyers apply their multiple to adjusted EBITDA. This is exactly the figure a quality of earnings analysis exists to defend, which is why a QoE becomes standard practice at this size.
Revenue and ARR multiples apply to high-growth software businesses with strong recurring revenue, where reinvestment keeps reported profit low by design. Here the earnings quality questions shift from profit to revenue itself: is the ARR contracted, correctly recognized, and retained? A revenue multiple without retention evidence is a starting point for negotiation, not a valuation.
Deal size also shapes the process itself. Businesses valued above $1 million typically warrant full sell-side advisory with a formal earnings quality workstream. For businesses under $1 million, a full QoE engagement is usually more than the deal requires; what matters is organized, verifiable financials and access to serious counterparties. That is the segment FE International's M&A Platform was built for: it gives both sellers and buyers of sub-$1 million technology businesses a direct route to vetted deals, sitting alongside FE's full advisory service for larger transactions rather than replacing it.
Inside the QoE: What the Analysis Actually Examines
A quality of earnings engagement typically analyzes 24 to 36 months of monthly financials plus the trailing twelve months. The work concentrates in five areas, and each one maps to a question buyers will ask anyway. Getting there first is the entire point of a sell-side QoE.
The adjusted EBITDA bridge. Every add-back gets documented and defended: one-time legal or relocation costs, discontinued product lines, owner compensation normalized to the market rate for the role, and personal expenses separated from operating costs. Each adjustment carries evidence. An add-back a buyer's accountant cannot verify is an add-back that disappears, and at a 6x multiple, every $100,000 of rejected add-backs removes $600,000 of enterprise value.
Proof of cash. The analyst reconciles reported revenue and expenses against bank statements and payment processor records. This single exercise builds more buyer confidence than any narrative, because it demonstrates the earnings are backed by actual cash movement.
Revenue quality and recognition. Revenue gets broken down by customer, product line, and cohort. The analysis tests whether recognition matches delivery, whether growth is broad-based or concentrated in a handful of accounts, and whether any period-end patterns suggest revenue was pulled forward.
Net working capital. The QoE establishes the normal level of working capital the business needs to operate, which becomes the peg in the purchase agreement. Sellers who understand their working capital rhythm before negotiations avoid giving up value in a mechanism most founders encounter for the first time at closing.
Concentration and dependency risk. Customer concentration, supplier dependence, and owner reliance all get quantified, because each one affects how durable the earnings are under new ownership.
Two further items round out the analysis. Debt-like obligations, such as deferred payroll taxes, unpaid bonuses, or customer deposits, sit outside reported EBITDA but reduce what a buyer will pay, so the QoE surfaces and quantifies them before they surface in negotiation. Out-of-period adjustments matter for the growth story: private companies often true up accruals only at year-end, which distorts monthly trends. Reallocating those entries to the correct months can change the growth rate buyers see, in either direction, and it is far better for the seller's own analyst to establish the accurate trend than for a buyer's team to discover it.
On the tools question, the analysis runs on primary records rather than summaries: general ledger detail, bank and processor reconciliations, subscription analytics exports, cohort retention tables, and contract-level revenue schedules. Sellers who maintain these as a matter of habit walk into diligence with the work already done. FE International's quality of earnings analysis team, staffed by licensed CFAs and chartered accountants, runs this exact process for lower-middle-market technology companies, on either side of a transaction.
The Tech-Specific Layer: Earnings Quality in Software vs. Non-Tech Deals
Earnings quality analysis in a technology deal differs from a non-tech deal in one fundamental way: the asset being priced is future recurring revenue, not physical inventory or contracted backlog. A manufacturer's QoE lives in inventory costing, receivables aging, and percentage-of-completion accounting. A software company's QoE lives in how revenue is recognized and how customers behave over time. Both share the add-back and working capital disciplines, but the technology layer adds four areas of scrutiny that decide tech deals.
ARR vs. bookings vs. recognized revenue. Buyers test whether the ARR figure in the deck matches contracted, live subscriptions, and whether recognized revenue follows delivery. Annual prepayments booked as immediate revenue, trials counted as ARR, or one-time services blended into recurring lines all get restated in diligence. Presenting them correctly from the start protects both the number and your credibility.
Deferred revenue. Cash collected for services not yet delivered is a liability the buyer inherits, and it directly affects working capital and price. Clean deferred revenue schedules are among the strongest quality signals a software seller can show.
Cohort retention and churn definitions. Buyers rebuild retention from raw data, cohort by cohort. Consistent churn definitions across the entire historical period matter more than a flattering headline number, because a definition change mid-history reads as a red flag even when the intent was innocent.
Capitalized development costs. Where engineering spend is capitalized rather than expensed, buyers examine whether the policy is consistent and whether adjusted EBITDA would hold under a more conservative treatment.
Earnings quality vs. revenue growth in tech acquisitions
Founders often assume growth is the headline buyers care about, and for years it was. The 2026 market weighs the two differently. Revenue growth tells a buyer how fast the business added customers; earnings quality tells them whether those customers, and the profits they generate, will still be there in year three. A company growing 40% with 85% retention and loose recognition practices is a harder underwrite than one growing 20% with 115% retention and clean books, because the second business compounds on its own while the first must keep replacing what it loses. Growth sets the ceiling on a valuation. Earnings quality determines how much of that ceiling a seller actually collects, which is why the strongest exits pair the two rather than trading one for the other.
The reward for passing this layer is measurable in the multiple. McKinsey's analysis of more than 100 B2B SaaS companies found that companies in the top quartile of valuation multiples, a median of 24x EV/Revenue against 5x for bottom-quartile peers, outperform on the core metrics of efficient growth. Net revenue retention leads the list: top-quartile-valued companies posted 113% NRR while bottom-quartile peers reached 98%. A 15-point retention gap corresponds to a near five-fold gap in what buyers pay per dollar of revenue.
Tech buyers price retention, not promises. The businesses that document their revenue durability earn the premium multiple.
The Metrics That Move Tech Multiples Up or Down in 2026
Earnings quality is the foundation, and a specific set of metrics determines where within the market range your multiple lands. These are the benchmarks buyers underwrite in 2026, and the same McKinsey research shows why they hold through market cycles: across an analysis of 55 B2B SaaS companies, top-quartile NRR performers sustained higher valuations than peers in both bull and bear markets. Earnings quality is what keeps a valuation standing when conditions shift.
Net revenue retention sits first for a reason. NRR above 110% means the business grows from its existing customers before any new sale, and buyers pay for that compounding. Below 100%, the buyer is purchasing a leak they must outrun. Customer expectations reinforce the stakes: software buyers scrutinize vendor spend more closely every year, so demonstrated retention is the clearest proof the product delivers ongoing value.
Growth durability and gross margin work as a pair. Buyers in 2026 reward efficient, repeatable growth over raw pace, and the Rule of 40, the sum of revenue growth rate and profit margin, has become the shorthand composite. A business growing 25% at a 20% margin reads as healthier than one growing 50% while burning cash, because the first profile survives a funding winter and the second depends on one.
Customer concentration moves multiples down faster than almost anything else. When a single customer represents a third of revenue, the buyer is underwriting that relationship, not your business. Diversified revenue earns the full multiple; concentrated revenue earns an earnout.
Owner dependence is the quiet discount. If sales, product, and key relationships all route through the founder, the earnings do not fully transfer, and the price reflects it. Documented processes and a capable second layer of management move value directly to the seller.
Billing structure and cash dynamics round out the list. Annual prepay improves cash flow but builds deferred revenue the buyer inherits; monthly billing shows real-time retention. Neither is wrong. What matters is that the structure is understood, consistently reported, and reflected in the working capital discussion.
The trend line for 2026 sharpens all of this. PwC's US technology deals outlook describes software entering an AI-led value creation cycle, with pricing shifting toward usage and outcomes and buyers distinguishing carefully between platforms with embedded workflows and proprietary data and those without. Usage-based pricing makes revenue recognition and cohort reporting more intricate, which raises the value of clean, consistent metrics rather than lowering it. And where multiples have reset in parts of the software market, disciplined buyers treat that as an entry point for high-quality assets, which concentrates demand on exactly the businesses that can prove their earnings. Every 2026 trend points the same direction: verification is the seller's best currency.
Sell-Side vs. Buy-Side QoE: Timing, Process, and Negotiating Position
Both sides of a transaction can commission earnings quality work, and the methodology is the same. What differs is who controls the narrative. A buy-side QoE happens after a letter of intent, when exclusivity has removed your other options and every finding becomes negotiating material for the buyer. A sell-side QoE happens before the business goes to market, while every issue it surfaces is still yours to fix quietly.
The timing that works is three to six months before launch. That window allows the analysis to complete, gives you room to resolve what it finds, and lets the results flow into the confidential information memorandum so buyers see verified numbers from first contact. The engagement itself follows a predictable arc: a detailed data request, several weeks of analysis with management sessions, then a draft report covering the adjusted EBITDA bridge, revenue quality, working capital, and identified risks.
Knowing what the data request contains removes most of the friction. Expect to provide two to three years of monthly financial statements and tax returns, general ledger detail, bank statements, revenue broken out by customer and product line, receivables and payables aging, payroll records, and material contracts. How quickly and cleanly a seller answers that request is the single biggest driver of timeline, and it doubles as a preview of how diligence itself will feel to a buyer. The management sessions that follow are collaborative rather than adversarial: the analyst walks through trends, tests explanations, and pressure-tests add-backs so the final report holds up under a buyer's review. Sellers who treat these sessions as a rehearsal for buyer meetings get a second benefit for the same fee.
The negotiating effect is the reason sellers invest. Verified earnings shift the burden of proof: instead of defending your numbers against a buyer's accountants, the buyer's team is reconciling against an independent report that already anticipated their questions. Diligence timelines compress, retrade attempts lose their footing, and competing bidders price against the same trusted baseline, which is what pushes offers toward the top of the range. In merger negotiations, earnings quality consideration is not one factor among many. It is the frame every price conversation happens inside.
A sell-side QoE converts diligence from an examination you undergo into a process you have already passed.
Earnings Quality in Action: What Real Deals Show
The pattern shows up at every deal size. At the top of the market, the two defining technology acquisitions of 2025, Alphabet's $32 billion purchase of Wiz and Palo Alto Networks' $25 billion acquisition of CyberArk, were both cybersecurity businesses built on contracted, recurring revenue with retention profiles buyers could model with confidence. Strategic acquirers paid landmark prices precisely because the earnings engines were provable, and almost half of strategic technology deal value above $500 million in 2025 came from AI natives or deals citing AI benefits, where scrutiny of revenue durability ran highest.
The same dynamic drives outcomes in the lower middle market, where most founders actually transact. When Upright Labs, an enterprise SaaS business, came to market through FE International, the preparation work produced 11 offers and a diligence process the founder described as significantly lighter than what peer entrepreneurs experienced, because the financial story had been organized and verified before buyers ever saw it. More recently, FE International acted as exclusive advisor to HealthIM, a public-safety and mental health technology company, in its acquisition by Pender Software Holdings, a deal grounded in the platform's demonstrated adoption and durable revenue base.
Different sizes, same lesson. Buyers reward earnings they can verify, and the sellers who invest in that verification before going to market consistently convert stronger interest into stronger closes.
The negotiating pattern is worth naming explicitly. In every one of these situations, the price conversation stayed anchored to the seller's numbers because those numbers had already been tested. When a buyer's diligence team finds nothing the seller has not already disclosed and documented, the discussion moves from earnings to terms, which is exactly where a well-advised seller wants it. Competitive tension does the rest: multiple qualified buyers pricing the same verified earnings base is the single most reliable way to reach the top of the valuation range.
After the Close: How Tech M&A Affects Long-Term Earnings Quality
Earnings quality does not stop mattering at closing. Buyers model how durable the earnings will be under their ownership, and the historical record explains their focus: the MIT Sloan analysis found that among S&P 500 acquirers, nearly half of deals are eventually divested, with an average holding period of a decade before the unwind. The deals that endure are the ones where the acquired earnings engine keeps running, which is why integration planning now reaches back into diligence itself.
Maintaining earnings quality after a technology acquisition comes down to protecting the things that generated it. Retention holds when customer relationships and product velocity survive the transition. Reporting integrity holds when revenue recognition policies, churn definitions, and cohort tracking carry over consistently instead of resetting under new systems. And the founder's documentation habits become the new owner's operating manual: the cleaner the handover, the smaller the integration risk premium built into the price.
For acquirers, improving earnings quality after the deal follows the same logic in reverse. The highest-return moves concentrate on the existing customer base: McKinsey's research on retention practices found that companies offering the most sophisticated value realization and adoption journeys produce NRR around seven percentage points higher than peers with basic practices in place. Structured onboarding, outcome-based customer check-ins, and a real expansion motion turn an acquired customer list into a compounding asset. Pricing discipline, consistent recognition policies, and monthly cohort reporting keep the improvement measurable. None of this is exotic. It is the same earnings quality playbook sellers use before a deal, applied by the new owner after it, and businesses that arrive with the foundations in place let the buyer start compounding on day one.
This is where sellers gain from thinking like buyers. A business that demonstrates transferable earnings quality, with processes that run without the founder and metrics defined consistently across its history, removes the biggest post-close risks from the buyer's model. Removed risk shows up in one place: a higher, cleaner offer.
How to Prepare Your Business Before Going to Market
Preparation compounds, and the strongest exits start 12 to 18 months out. The work is not glamorous, but every item below maps directly to a diligence question, and answering them in advance is what protects the multiple.
- Move to accrual accounting and reconcile monthly. Cash-basis books force the QoE analyst to rebuild your financials, which adds time and uncertainty. Monthly reconciliations against bank and processor records make proof of cash a formality.
- Document add-backs as they happen. A contemporaneous file of one-time costs, owner expenses, and their evidence is worth more than any reconstruction done the month before launch.
- Fix your metric definitions and never change them. Pick your churn, NRR, and ARR definitions, write them down, and apply them across the full history buyers will review.
- Reduce owner dependence visibly. Delegate, document processes, and let the numbers show the business runs without you.
- Resolve related-party items early. Below-market rent from an owner-held property, family payroll, and shareholder loans all get adjusted in diligence; clean them up on your own timeline instead.
- Maintain a live deferred revenue schedule. For any business billing in advance, a monthly schedule of cash collected against services delivered turns one of diligence's toughest questions into a routine answer.
- Check contract assignability now. Customer and supplier agreements with change-of-control or assignment clauses can slow a closing; identifying them early keeps the timeline in your hands.
Three to six months before launch, the path splits by size. For businesses above roughly $1 million in EBITDA, commission the sell-side QoE and build the data room around it; the report becomes the backbone of your marketing materials and your defense in negotiations. For businesses under $1 million, channel the same discipline into organized, verifiable financials and go where the buyers are: the M&A Platform connects sellers of sub-$1 million technology businesses with pre-vetted buyers, and gives buyers listings whose numbers have already been through review. Either way, the first step is the same: understand what your business is worth today. FE International provides a free, no-obligation valuation grounded in comparable transaction data, so preparation starts from a real number rather than a guess.
Protect Your Multiple Before Buyers Test It
The 2026 market is generous to prepared sellers. Capital is abundant, technology is the destination for it, and buyers are applying the sharpest diligence tools the industry has ever had. In that environment, quality of earnings in tech M&A is not a compliance step. It is the difference between a valuation that survives contact with a buyer's accountants and one that gets rebuilt in their favor. Every section of this guide points to the same conclusion: earnings quality is built long before the deal and rewarded at the closing table.
Start with the number. Get a free valuation from FE International and understand where your business stands against real transaction data across SaaS, ecommerce, fintech, cybersecurity, edtech, AI, and agency verticals. From there, whether the right path is a full advisory process with a sell-side quality of earnings analysis behind it, or a direct route to vetted buyers through the M&A Platform, you will be negotiating from verified ground. That is where the best exits begin.