Why This Matters

If you’re considering buying or selling a business, especially within the next 1–3 years, early preparation can have a meaningful impact on valuation and deal certainty. A proactive approach to QoE can help you identify risks, validate earnings, and navigate diligence with confidence.

What is a Quality of Earnings?

A QoE is an in‑depth analysis of a company’s earnings and cash flows, focused on sustainability, normalization, and underlying business drivers, not just whether the financial statements are GAAP‑compliant. Typical QoE procedures include:

• Normalizing EBITDA for non-recurring, non-operating, or owner-specific items.
• Analyzing revenue and expense recognition, particularly for cash-basis companies
• Reviewing key balance sheet accounts for embedded risk that affect value (reserves, accruals and contingencies).
• Analyzing net working capital (NWC) trends to support a working capital “peg” or target at close.
• Analyzing and performing a quality of revenue assessment, including margins, customer retention, concentrations, products, and geography.

What is Buy-Side QoE?

If you’re acquiring a business, the core question is: “Are we paying the right price for the earnings we will actually get post-close?” A buy-side QoE helps:

•  Assess the accuracy of the target’s financial statements (income statement and balance sheet) and determine whether they are prepared on a cash or accrual basis.
• Confirm the quality, sustainability, and drivers of EBITDA and cash flow.
• Identify negative adjustments, structural weakness or trends that might warrant a price reductions and/or earn-outs.
• Develop the working capital peg and identify and evaluate all forms of debt and potential debt-like items.
• Analyze historical profitability trends and assess the growth potential of the Target.
• Review customer retention and concentration.

What is Sell-Side QoE?

If you’re selling a business, on the other hand, the core question is: How do we prepare our financials so buyers see the full value of the business, and don’t find reasons to lower the price? A sell-side QoE helps you:

• Identify and remediate accounting or process issues before buyers use them as leverage.
• Validate and “pre‑position” adjusted EBITDA with a defensible addback schedule.
• Anticipate buyer questions, reduce diligence fatigue, and shorten the overall timeline.
• Increase competitive bids by giving buyers more confidence in the numbers, potentially supporting a higher price and better terms.

Buy-Side: What the process looks like

At a high level, buy-side process follows four main stages:

1. Planning: Align scope with the deal, industry risk, and size (e.g., more depth on revenue recognition for SaaS, inventory and gross margin for manufacturing)..

2. Information Gathering: Detailed data room request: monthly trial balances, detailed GL, AR/AP aging, customer/product level data, backlog, pipeline, capex, and debt schedules. This may also include management meetings or site visits to better understand how the business operates.

3. Analysis: Advisors analyze the company’s financial performance, assess valuation, and identify potential risks, such as legal exposure, regulatory concerns, or operational weaknesses.

4. Decision-Making: Findings are summarized in a report that helps the buyer determine whether to proceed, renegotiate terms, or walk away from the deal.

Sell-Side: What the process looks like

Sell-side process happens before the company goes to market. The goal is preparation, not reaction.

1. Internal Review: The seller evaluates financial performance, operations, and legal compliance to identify any weaknesses that could concern buyers.

2. Organization and Documentation: Financial records and contracts are organized in a secure data room. Prepare a QoE with a transparent, defensible adjusted EBITDA, including schedules buyers are likely to expect.

3. Addressing Risks: Potential red flags are addressed, where possible, before buyers begin their review. This may include resolving accounting issues or legal matters, as well as preparing management talking points and supporting schedules for key judgment areas, such as customer concentration, recent price increases, or new investments.

4. Supporting Buyers: Once buyers begin their own diligence, the seller provides timely access to information and clear responses to questions. The sell-side QoE should be used as the 'single source of truth' to respond quickly and consistently across multiple buyer workstreams.

By conducting a thorough QoE due diligence, buyers can mitigate risks and validate their investment, while sellers can maximize their business’s value, facilitate a smoother transaction, reduce re-trades, and support higher valuations and better terms. Ultimately, these efforts contribute to successful M&A outcomes for both parties.