In M&A, the question is rarely whether the target made a profit last year. The more important question is whether that profit will still exist after the transaction closes, the seller steps back, exceptional items disappear and the business is operated on arm’s-length terms.

PwC describes Quality of Earnings as an analysis of the target’s underlying earnings to determine a sustainable run-rate, including normalization of one-time items and pro forma effects. That distinction is central to deal valuation: a buyer should understand not only what the company reported, but what portion of those earnings is repeatable.

This article goes deliberately deeper than our broader guide to buying a company in Turkey. It focuses on one valuation question only: what is the right EBITDA base for the transaction?

What is Quality of Earnings?

Quality of Earnings, or QoE, is a transaction analysis used to assess the sustainability, composition and credibility of a target company’s earnings. It typically starts with reported EBITDA, reconciles that number to the accounting records and then evaluates adjustments required to arrive at a normalized or sustainable level of performance.

A QoE review is not a valuation by itself. It establishes one of the most important inputs into valuation. If enterprise value is based on an EBITDA multiple, every accepted adjustment can have a multiplied impact on price.

A worked EBITDA normalization example

Assume a Turkish target presents reported EBITDA of TRY 68 million. Management argues that several costs should be added back. The buyer also identifies income and expenses that have not been normalized by the seller.

The example illustrates why a QoE review can change a deal even when the accounting records are technically complete. The buyer is not alleging that the company failed to record revenue or expenses. The buyer is asking which of those items reflect the business it will own after closing.

The seven EBITDA adjustments buyers should test first

1. Owner and shareholder expenses

Owner-managed Turkish businesses may include costs that will not continue after a sale: personal vehicles, non-business travel, family payroll, private expenses or other shareholder-specific items. These can be legitimate positive EBITDA adjustments where they are genuinely non-operating and will disappear after closing.

But the analysis cuts both ways. If the founder works full-time and receives no salary, or takes compensation below market, the buyer may need a negative adjustment for the cost of replacing that role. Removing the owner’s expenses while ignoring the owner’s economic contribution overstates sustainable earnings.

2. One-off and exceptional costs

Litigation, restructuring, relocation, a failed project, duplicate rent during a move or a genuinely isolated advisory cost may be candidates for normalization. The buyer should ask three questions: Did the event actually occur once? Is the cost absent from future operations? Is there documentary evidence?

The phrase “one-off” deserves particular scrutiny. Businesses often have a different exceptional item every year. A sequence of individually non-recurring costs can become recurring in aggregate.

3. Non-recurring income

QoE adjustments are not only add-backs. Buyers should remove income that is not part of normal operations: litigation proceeds, insurance recoveries, asset-sale gains, one-time rebates, exceptional customer settlements or unusual government support where continued eligibility is uncertain.

A seller presentation that identifies non-recurring expenses but leaves non-recurring income untouched is not a neutral normalization.

4. Founder and management compensation

Management costs should be assessed on the basis of the post-deal operating model. If a founder will leave, ask what it costs to replace the founder’s commercial, technical or executive responsibilities. If senior managers are paid below market, a buyer may need to normalize compensation upward.

Conversely, unusually high owner compensation that will not continue may support a positive adjustment. The correct answer depends on the role, not the shareholder’s title.

5. Related-party transactions

Rent, management fees, procurement, sales, financing and shared services with shareholders or group companies should be tested against arm’s-length economics. A target may report attractive EBITDA because it rents a property from the founder below market, receives services without charge or earns margin from a related party on non-commercial terms.

QoE should therefore identify what the business would earn if these arrangements were reset to normal commercial terms after closing.

6. Foreign-exchange effects

FX is particularly important in Turkish businesses with foreign-currency revenue, imports, debt or supplier contracts. A foreign-exchange gain is not automatically a QoE adjustment, and neither is an FX loss. The buyer needs to understand where the exposure arises and whether it is operational, financing-related, recurring or presentation-driven.

Where revenue growth is materially influenced by currency movement, constant-currency analysis can also help distinguish underlying volume and price performance from translation or transaction effects.

7. Under-accrued or capitalized costs

Sustainable EBITDA can be overstated if recurring costs are missing, deferred or capitalized. Examples include management bonuses, annual professional fees, maintenance, payroll-related obligations, software development or other costs that have been recorded on the balance sheet rather than expensed.

This issue is especially relevant in technology, software and gaming targets. If a large portion of development spending is capitalized, reported EBITDA can look stronger while the business still requires significant recurring cash investment to maintain its product pipeline.

Turkey-specific issues that can distort EBITDA analysis

A Turkish QoE exercise should not simply import a global checklist. The accounting data and operating environment can create additional comparability issues.

Inflation-accounting entries deserve particular care. The objective is not to “reverse inflation accounting” mechanically. The buyer should first understand which accounting basis produced each dataset and then create a consistent analytical bridge. Otherwise, apparent year-on-year growth or margin expansion may partly reflect measurement differences rather than economic improvement.

Quality of Revenue comes before Quality of Earnings

EBITDA cannot be high quality if the revenue base is weak. A robust QoE review therefore looks below total sales and asks how revenue is generated.

• Monthly revenue by customer and product
• Customer concentration
• New vs recurring customers
• Contracted vs non-contracted revenue
• Price vs volume growth
• Gross-margin movement
• Revenue cut-off at year-end and month-end
• Credit notes and returns after period-end
• Related-party revenue
• Post-period cash collection
• One-time project revenue
• Foreign-currency impact

Consider a company whose largest customer represents 45% of EBITDA. The historical EBITDA may be correctly stated, but its quality can still be weak if the customer has no long-term contract, is renegotiating prices or can terminate on short notice. QoE is therefore not merely an exercise in removing exceptional accounting entries; it is an assessment of how repeatable the earnings stream is.

Run-rate adjustments: useful, but dangerous

A run-rate adjustment attempts to reflect the full-year effect of a change that occurred partway through the historical period. Examples include a new customer won in October, a price increase implemented in November, closure of an unprofitable location or hiring of a new management team.

These adjustments can be legitimate, but they are more judgmental than removing a clearly documented historic one-off. The buyer should distinguish between achieved run-rate and forecast improvement.

Seller add-backs vs buyer-accepted adjustments

Sellers have an understandable incentive to present the highest defensible EBITDA. Buyers should not reject add-backs automatically, but each adjustment should survive an evidence test.

EBITDA quality should be tested against cash

A company can report attractive EBITDA and still generate weak cash flow. That does not necessarily mean EBITDA is wrong, but it may indicate that the earnings require unusually high working capital, recurring capex or capitalization of operating expenditure.

A buyer should therefore reconcile EBITDA to operating cash generation and investigate persistent gaps. Common drivers include overdue receivables, inventory build, supplier-payment stretch, capitalized development, customer advances, significant maintenance capex and unusual tax or payroll timing.

This is why Quality of Earnings, net working capital and net debt should be analyzed together. PwC’s current financial due diligence framework similarly treats QoE, net working capital, cash-flow levers and closing mechanisms as connected transaction workstreams.

What should not be hidden inside QoE?

A disciplined deal team separates different value questions instead of pushing every issue into EBITDA.

A practical buyer-side QoE workplan

A focused review does not need to begin with hundreds of documents. The first objective is to build a reliable monthly P&L bridge and identify the few issues that can actually move valuation.

• Obtain monthly trial balances for at least 24–36 months
• Reconcile management EBITDA to the general ledger
• Map statutory accounts into transaction reporting categories
• Analyze monthly revenue, gross profit and EBITDA trends
• Review top customers and post-period collections
• Identify owner and related-party transactions
• Test large or unusual journal entries
• Review payroll by employee and department
• Analyze annual bonuses and missing accruals
• Inspect professional fees and exceptional costs
• Review FX income and expense by source
• Analyze capitalized costs and recurring capex
• Challenge each seller-proposed add-back
• Prepare reported-to-normalized EBITDA bridge
• Calculate valuation sensitivity by adjustment
• Link material findings to net debt, NWC and SPA workstreams

QoE red flags that deserve immediate attention

The buyer should be able to explain every TRY 1 of adjusted EBITDA

A good Quality of Earnings analysis is not the longest adjustment schedule. It is the shortest defensible bridge between what the company reported and what a rational buyer expects the business to earn on a sustainable basis.

The strongest adjustments are evidence-based, economically logical and consistent with the post-closing operating model. The weakest are labels: “one-off,” “non-recurring,” “synergy,” “owner cost” or “run-rate” without support.

In a multiple-based transaction, that discipline matters because the EBITDA debate is multiplied directly into enterprise value. A TRY 5 million normalization difference may not sound decisive inside a P&L. At 7.0×, it becomes a TRY 35 million negotiation.

Frequently asked questions

Sources & further reading

1. PwC, Financial Due Diligence — current discussion of sustainable performance, Quality of Earnings, working capital and cash-flow drivers.
2. PwC, Pre-deal Insights — stress-testing EBITDA adjustments, working-capital mechanics and debt-like exposures before full diligence.
3. PwC, Mergers & Acquisitions / Buy-side Financial Due Diligence — normalized earnings, net debt and normalized working-capital analysis.