What Quality of Earnings Won't Tell You About Growth
What's a sales and marketing guy doing writing about Quality of Earnings (QoE)? Fair question.
Earlier in my career, as Chief Insights Officer at a major Omnicom marketing agency, I helped companies answer a deceptively simple question: What did they actually get for their investment?
Clients were spending millions of dollars annually on multi-year marketing and sports partnerships. Without credible proof of return, renewal was anything but automatic.
They knew what they paid. More importantly, they needed to know what they bought and whether it justified repeating the investment.
Business acquisitions raise a similar question: What are you actually buying?
The SBA's new QoE requirements for certain business acquisitions, effective October 1, 2026, make that question relevant to an even broader group of buyers.
A good QoE examines the quality and sustainability of earnings, including revenue trends, expenses, and adjustments. It helps buyers understand the financial performance supporting the purchase price.
But it isn't designed to fully assess how well the business is positioned to keep growing after the deal closes.
The Scoreboard versus a Playbook
Think of revenue as the scoreboard, not the playbook. A QoE helps establish whether the points on the board count. It doesn't tell you whether the team has a repeatable way to score again.
Consider a manufacturer that has grown 15% annually for three consecutive years. Margins are healthy, customer retention is strong, and its QoE confirms the earnings.
But what if most new business comes through the founder's relationships, salespeople lack a consistent approach to finding and winning customers, and leaders disagree about the strength of the company's competitive position?
Those conditions can coexist with strong financial results, but they can also impact the company's ability to sustain growth, particularly if the founder steps back, competition increases, or the market changes.
This is especially relevant in the lower middle market, where informal practices and personal relationships can produce impressive results for years. But when the company tries to scale, enter new markets, integrate an acquisition, or operate without its founder at the center of every important decision, growth can stall.
A business can be successful and still have less transferable growth capability than a buyer assumes.
Three Key Growth Questions Before Closing
The most consequential growth risks are often not obvious. In fact, they can sit quietly for months before they show up in EBITDA. Three areas in particular bring home this reality.
Can sales success be repeated? Calls, proposals, and win rates show activity and results. They don't establish whether the team shares an effective method for qualifying, pursuing, pricing, and winning opportunities.
A full pipeline can conceal weak qualification, and strong close rates can conceal a team that only calls on known relationships.
Before adding salespeople, a buyer should know whether there is a process worth scaling, or an individual's success that will be difficult to reproduce.
Can the company create demand beyond its existing relationships? Middle-market leaders sometimes say they have "no real marketing" because leads come through referrals and reputation. A good reputation is an asset, but it isn't a scalable demand-generation system.
If the company enters a new market, targets a different buyer, or loses a well-connected founder, can it build awareness and credibility on its own? Can it say why it's different in a way customers recognize and salespeople can use?
Does leadership agree on a workable growth plan? Whether leadership agrees on what's driving growth or holding it back is difficult to see, let alone measure, in a QoE report.
The CEO wants larger customers, sales wants to expand its existing customer base, operations is concerned about capacity, and finance sees margin pressure.
Each perspective may have merit. The risk is assuming those perspectives add up to an agreed plan. And agreement alone isn’t enough. A leadership team can align on a bad plan.
Constructive disagreement can improve decisions. Unexamined disagreement can undermine execution, particularly when new ownership introduces more aggressive growth expectations. Misalignment is often invisible during diligence, only to surface as friction during integration or the first 100 days.
Does leadership share an understanding of the company's growth priorities, capabilities, constraints, and competitive position or do they avoid discussion and work in their silos?
Doesn't Commercial Diligence Cover Growth?
Yes and no. Thorough commercial diligence examines internal capabilities, operational weaknesses, key markets, customers, competition, pricing, and growth opportunities.
But its scope and methods vary by transaction and provider. Buyers may still lack a consistent, scored framework for evaluating growth capabilities and leadership perspectives that establishes a baseline for identifying where deeper diligence is warranted.
Measuring Capabilities Behind the Results
A Quality of Growth (QofG) assessment complements commercial diligence, along with QoE and management interviews, by providing a structured, standardized way to evaluate and quantify a company's durable growth drivers and leadership alignment. This enhances a firm's ability to target diligence in areas that need more attention.
The Breakout Group's QofG Report evaluates more than 70 data points across Sales, Marketing, Brand, Culture, and leadership and functional alignment. It produces 0–100 Breakout Scores for each area and for the company as a whole, identifies strengths and constraints, and reveals where leaders agree or see the business differently.
Before a transaction, those findings help examine management's growth assumptions and focus further diligence. After closing, they can help establish priorities for the first 100 days. Over time, repeat assessments can help track changes in growth capabilities and alignment across portfolio companies.
QofG scores aren't a verdict and they don't predict future growth. They make the capabilities supporting a growth plan more visible, measurable, and easier to discuss.
Know What You're Buying
My agency clients needed evidence of what their partnerships had delivered before deciding whether to invest again.
An acquisition requires a second layer of scrutiny: understanding what has produced the results in addition to what the organization can sustain under new ownership.
QoE assesses the quality and sustainability of the earnings supporting the purchase price. QofG assesses the company's strengths, constraints, and capability to support durable growth.
Before you pay for the next stage of growth, why wouldn't you measure both?
