A quality of earnings report, or QoE, is an accounting review that tests whether a business's reported EBITDA is real and will repeat. In an ecommerce acquisition it is where the price actually gets set, because the multiple is agreed early and the earnings it applies to are argued over later.
- Seven lines move most in a Shopify brand: revenue recognition, returns, landed cost, inventory, marketing timing, founder costs and one-off expenses.
- In the worked example below, $1.5M of reported EBITDA becomes $1.27M adjusted, which is $1.15M less at an illustrative 5x multiple.
- A sell-side QoE done before a sale finds the same adjustments on the seller's timetable instead of the buyer's.
Source: Taylor Sicard, Taylor Sicard Consulting · Worked example is illustrative, not a benchmark
What is a quality of
earnings report for an
ecommerce brand?
A quality of earnings report tests whether the EBITDA a seller presents is real, repeatable, and calculated the way the buyer will calculate it. It is not an audit. An audit says whether financial statements follow accounting rules; a QoE asks whether the earnings those statements show will still be there after the business changes hands.
The distinction matters most in ecommerce, because a Shopify brand runs on three systems that rarely agree: the store's order data, the payment processor's payouts and the bank. A QoE reconciles them. Almost every adjustment it produces comes from a gap between what Shopify reports as sales and what actually arrived as cash, net of what was refunded, reserved or owed.
The multiple in a deal is usually agreed in the letter of intent. The earnings it applies to are agreed after the QoE. That order is why the report moves price more than any negotiation over the multiple does. I have been on both sides of that table, and the conversation after a QoE is where most of the value in a deal gets decided.
Which lines does a QoE
adjust in a Shopify
brand?
Seven lines account for most of the movement between reported and adjusted EBITDA in a direct-to-consumer brand. Some lower the number, one or two raise it, and a few move gross margin without touching EBITDA at all, which still matters because buyers value margin structure.
| Line | What the QoE tests | Usual direction |
|---|---|---|
Revenue recognition | Gross sales vs net of discounts, refunds and chargebacks; prepaid subscriptions and preorders counted when shipped, not when paid; gift card balances held as a liability | Down |
Returns | Returns booked when they happen rather than reserved against the sales that caused them, which flatters the months before a sale | Down |
Landed cost | Freight, duty and fulfilment inputs sitting in operating expenses instead of cost of goods | Neutral for EBITDA, down for gross margin |
Inventory | Obsolete or discontinued stock still carried at cost; count differences against the system | Down |
Marketing timing | Ad spend booked when paid rather than when run; product seeding and samples hidden in cost of goods | Either way |
Founder costs | A founder paid below market to run the business, or personal costs run through it | Usually down for the salary, up for personal costs |
One-off costs | A rebrand, a replatform or a legal matter that will not recur, if it is documented | Up |
Two items sit outside EBITDA and still change the deal. The first is cash held back by the payment processor. Shopify describes a reserve as a temporary hold on transactions to cover disputes and refunds (Shopify Help Center, reserves in Shopify Payments), and it shows up in working capital. The second is sales tax. Since the Supreme Court's South Dakota v. Wayfair decision in 2018, states can require online sellers to collect tax once they pass an economic threshold. A brand that never registered carries a liability, and a buyer will want it held back from the price.
If reserves are new to you, how Shopify Payments reserves and payouts work covers the mechanics. The margin lines connect to contribution margin vs gross margin, which is the same arithmetic a buyer runs.
What does a QoE do to
the price of a $10M
brand?
Take an illustrative Shopify brand doing $10M in revenue with $1.5M of reported EBITDA. These numbers are an example, not a benchmark, but each adjustment is the kind that shows up in real diligence, and the arithmetic is the same at any size.
| Adjustment | Why | Effect on EBITDA |
|---|---|---|
Reported EBITDA | As presented by the seller | 1,500 |
Founder salary normalised | Founder paid $60K; the assumed cost of a hired general manager is $180K | (120) |
Returns reserve | Q4 sales returned in Q1 were booked in Q1 | (90) |
Inventory write-down | Discontinued SKUs carried at full cost | (70) |
Prepaid subscriptions | Revenue counted when paid instead of when shipped | (60) |
Rebrand agency fee | Documented, one-time, will not recur | 110 |
Freight moved to cost of goods | Reclassified from operating expenses | 0 (gross margin down 2 points) |
Adjusted EBITDA | 1,270 |
The seller walked in with $1.5M and walked out with $1.27M. At an illustrative 5x multiple that is $1.15M less on the price, and not one number in the letter of intent changed. The freight line moved nothing in EBITDA and still cost two points of gross margin, which is the kind of change that shifts which buyers stay interested.
One thing the table leaves out on purpose: sales tax. If the brand shipped into states where it passed the economic threshold and never registered, the uncollected tax is a liability rather than an EBITDA adjustment. Buyers usually hold part of the price in escrow or ask the seller to file voluntary disclosures before closing. Either way it reduces what the seller receives at close, even though the multiple never moves.
The multiple gets agreed early. The earnings it applies to get argued about last, and that argument is worth more.
Why does a QoE also set
the working capital
you hand over?
A QoE usually produces two numbers, not one. Adjusted EBITDA sets the headline price, and a normal level of net working capital, the peg, sets how much inventory, receivables and payables the business must be delivered with. If the business closes below the peg, the difference comes off the price.
Ecommerce makes the peg harder than it looks, because working capital swings with the calendar. A brand that builds inventory from August for the holidays and sells it down by January has a very different balance in each month. A peg set from a low month leaves the seller short; one set from a high month overpays the buyer. The fair answer is an average across a full year of month-end balances, and the QoE is where that average gets calculated.
Three ecommerce items belong in that calculation and are often left out. Cash held back by the payment processor is a current asset the seller does not control. Prepaid subscription and gift card balances are liabilities the buyer inherits, because those customers are owed product. And inventory counted at landed cost, not supplier invoice, is the only figure that matches the cost of goods the buyer will see.
Founders tend to spend their negotiating energy on the multiple and then lose ground on the peg, which is technical enough that it rarely gets the same attention. It is worth the same scrutiny, because a peg set too high costs the seller in exactly the same currency as a lower multiple.
Which add-backs survive
a buyer's challenge,
and which do not?
Add-backs are the costs a seller argues will not recur under a new owner, added back to EBITDA to lift it. They are the most contested lines in a QoE, because every one of them raises the price and the buyer is paying for each.
The add-backs that survive share three features. Each is documented with an invoice or contract. Each is genuinely one-time: a rebrand, a platform migration, the legal cost of a settled dispute. And the business will not need to spend the money again to keep its revenue, which is the test most add-backs fail.
The ones that do not survive are usually costs relabelled as unusual. An agency retainer that ran for three years is not one-time because it ended last quarter. A "test" ad budget that happens every quarter is marketing. Founder travel is an add-back only if the trips had nothing to do with selling, and buyers will read the calendar. Each weak add-back also costs credibility, because once a buyer rejects two, it starts discounting the others.
How does an earnout
change what the QoE
is for?
An earnout is part of the price paid later, and only if the business hits agreed targets after the sale. It moves the QoE's job from settling one number to defining the measure the earnout will be paid on, because the seller now has to trust the buyer's accounting for a year or more.
| Deal | Upfront | Deferred part | Paid on |
|---|---|---|---|
Lee (denim IP) to Authentic Brands Group | $750M | Up to $250M earnout | Post-close performance (Retail Dive) |
curli AG to Thule | About $13M initial | Up to CHF 6.8M earnout | 2026 results, through June 2027 (Thule release) |
Gruns to Unilever | Undisclosed | 20% retained by prior shareholders, bought out later | A future buyout Unilever has booked as a liability (Unilever release) |
In an earnout the adjustments from the QoE become the rulebook. If returns are reserved one way in the QoE and booked another way afterwards, the earnout number moves without the business changing at all. So the definitions matter more than the headline: which revenue counts, how returns and cost of goods are measured, and whether the buyer's integration costs are charged against the target. Write them into the purchase agreement using the same method the QoE used, and the earnout pays on the business rather than on the bookkeeping.
Every row above comes from the consumer brand exits tracker, which logs deal terms when a buyer or seller discloses them.
Should the buyer or
the seller commission
the QoE?
Buyers commission a QoE by default, because it protects the price they are about to pay. A seller can commission its own, a sell-side QoE, before going to market. It finds the same adjustments, but on the seller's timetable, with time to fix what can be fixed and explain what cannot.
A sell-side QoE does not replace the buyer's; most buyers still run their own. What it removes is surprise. The adjustments a buyer finds after the letter of intent become a retrade, a request to lower the agreed price. The same adjustments disclosed before the letter of intent are simply part of the number.
For a brand heading toward a sale, the QoE work starts with the data room. What a DTC data room needs covers the files, and the ecommerce due diligence checklist shows the other side: what a buyer screens for before paying for any of this.
What does a QoE not
tell a buyer about an
ecommerce brand?
A QoE tests whether the historical earnings are real. It does not test whether they will grow, or how fragile the revenue behind them is. That is commercial diligence, a separate workstream that looks at customers, channels and the product itself, and in a DTC brand it often matters as much as the accounting.
Commercial diligence asks the questions a QoE leaves open: how much revenue comes from returning customers, whether recent cohorts behave like older ones, how concentrated traffic is in one paid channel, and what share of sales depends on a marketplace the brand does not control. A clean QoE on a brand whose newest customers are not coming back still describes a business that is shrinking.
The two workstreams feed each other. A returns adjustment in the QoE is a question for commercial diligence about product quality. A spike in revenue the QoE traces to one promotion is a question about how much of the base is bought with discounts. Sellers who prepare for both, rather than only the accounting, arrive at the negotiation with fewer surprises on either side.
What should a Shopify
brand prepare before
a QoE?
Most of a QoE's cost and friction comes from reconciling data the business never reconciled itself. Preparing these eight things in advance shortens the work and, more usefully, shows you your own adjusted EBITDA before anyone else calculates it.
- Monthly P&L for at least 24 months, on the same chart of accounts throughout.
- Shopify order exports reconciled to processor payouts and bank deposits, month by month.
- Cost of goods by SKU on a landed basis: product, inbound freight, duty and fees.
- Returns and refunds by month, matched to the month of the original sale.
- Ad spend by channel and month, straight from the ad accounts, not from the P&L.
- Prepaid subscription, preorder and gift card balances at each month end.
- Sales tax registrations and filings by state.
- Support for every add-back you intend to claim: invoices, contracts and a sentence on why it will not recur.
If you are a year or two from a sale, the exit readiness score shows which of these gaps a buyer will find first.
The number that gets
paid is the adjusted one.
A buyer does not pay a multiple of the EBITDA on your dashboard. They pay a multiple of the EBITDA that survives a quality of earnings review, and in a Shopify brand the gap between the two is mostly reconciliation, returns and cost of goods.
Run the adjustments yourself before a buyer does. The ones that lower the number will be found either way; finding them first is the difference between a price and a retrade. It is the core of the exit preparation work I do with founders. For who is buying consumer brands and what they have paid, the consumer brand exits tracker logs the deals as they happen.
Questions sellers and
buyers ask about a
quality of earnings.
What is a quality of earnings report in ecommerce?
It is an accounting review that tests whether an ecommerce brand's reported EBITDA is real and repeatable. For a Shopify brand it mostly reconciles store sales to payouts and bank deposits, then adjusts for returns, landed cost, inventory, marketing timing, founder costs and one-off expenses.
Is a quality of earnings report the same as an audit?
No. An audit gives an opinion on whether financial statements follow accounting rules. A quality of earnings review asks whether the earnings those statements show will persist under a new owner, and it adjusts EBITDA to the figure a buyer will apply a multiple to.
Does a quality of earnings report look at customer cohorts?
Not usually. A quality of earnings review tests historical financials. Customer cohorts, channel concentration and repeat purchase behaviour belong to commercial diligence, a separate workstream. In a DTC brand buyers generally run both, because clean earnings from a shrinking customer base still describe a shrinking business.
What is an earnout in an ecommerce acquisition?
An earnout is part of the purchase price paid after closing, and only if the business hits agreed targets such as revenue or EBITDA. Lee's sale to Authentic Brands Group in 2026 paired $750M upfront with an earnout of up to $250M. The quality of earnings method usually becomes the rulebook for measuring it.
Which adjustments lower EBITDA most in a DTC brand?
Returns booked when they happen instead of reserved against the original sales, founder salaries below the cost of a hired replacement, obsolete inventory carried at full cost, and prepaid subscriptions or preorders counted as revenue before they ship. Documented one-off costs are the main adjustment that raises it.
Know your adjusted EBITDA before a buyer does.
I have been on both sides of an acquisition, and the quality of earnings conversation is where most of the value moves. If a sale is on your horizon, I can help you run the adjustments early and decide which ones to fix.
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