Run a QofE on Yourself Before a Buyer Does

The quality of earnings report is one of the most misunderstood documents in the M&A process. Sellers know it exists. Most of them think it is something that happens to them during diligence, something the buyer commissions, something they react to.

The smartest sellers commission one themselves. Eighteen to twenty-four months before they go to market. Before a buyer is involved. Before the clock is running.

Here is why.

What a quality of earnings report actually does

A QofE is not an audit. An audit confirms that your financial statements comply with accounting standards. A QofE asks a different question: do these financial statements accurately represent the earnings power of this business for an incoming buyer?

The QofE team goes line by line through your revenue and expenses. They test whether revenue is recurring or one-time. They scrutinize every add-back you have claimed. They analyze the timing of revenue recognition and expense categorization. They look at customer concentration, contract terms, and anything else that affects whether the EBITDA you are presenting is the EBITDA that will show up next year.

When the buyer commissions this report, the findings go to the buyer first. Whatever it says, the buyer now knows before you do. If there are problems, the buyer uses them as leverage. Price reductions. Escrow holds. Earnout restructuring. You are reacting with no time to fix anything.

What a sell-side QofE changes

When you run the QofE yourself, the dynamic inverts. You see the findings first. You have time to address them.

A revenue item that should not have been recognized in that period? You can restate it and present clean numbers from the start. An add-back that does not hold up to scrutiny? You can remove it from your schedule rather than have a buyer’s accountant remove it during diligence. A customer concentration issue that changes the revenue quality story? You can start addressing it now, when you have two years to diversify, rather than six months before close when it is too late.

Owners who do this work consistently tell me the same thing afterward: the findings were uncomfortable, and they were glad they found out before a buyer did. Almost every time there are surprises. Almost every time those surprises are fixable with enough runway.

What it typically finds

Every business is different, but the findings cluster around the same issues.

• Add-backs that cannot be documented. The QofE team asks for receipts and support for every add-back. Items that cannot be substantiated come out. At a 5x multiple, $50K of unsupported add-backs is $250K off the price.
• Revenue timing issues. Cash-basis revenue recognition does not match accrual standards. Projects that span year-end are often recognized on a cash basis that overstates one period and understates another.
• One-time revenue items in the run-rate. A large project, a settlement, a government program. If it is in your revenue and it is not repeating, it comes out of the normalized number.
• Understated expenses. Deferred maintenance, below-market owner compensation, personal expenses that a new owner would not have. These affect the true earnings picture.

What it costs vs. what it saves

A sell-side QofE typically runs between $15,000 and $40,000 depending on the size and complexity of the business. That sounds like a lot until you run the math on what a single add-back adjustment costs at a 5x multiple.

A $100K adjustment going the wrong way in diligence is $500K off the purchase price. A $200K adjustment is $1M. The QofE fee is not a cost. It is insurance against having the buyer’s team find something you did not know about, with no time to respond.

The owners who close at the number they expected are almost always the ones who knew their own financials the way a buyer would see them before anyone else did. Run the QofE on yourself. Find it first. Fix what you can. And walk into the process knowing exactly what is there.

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If you didn’t know, now you know.

* Every deal I look at is under NDA. The stories I discuss are real. Some identifying details — company name, specific geography, exact numbers — may have been changed to protect the seller. The lessons haven’t.