There’s a conversation we have with almost every seller, usually a week or two after the letter of intent is signed, when the buyer’s diligence list arrives and “quality of earnings analysis” sits at the top of it. The owner calls, a little annoyed, and asks some version of the same question: we’ve been audited for years — why are they doing this again?
It’s a fair question, and the answer is worth understanding properly, because the QoE — not the audit — is the document that will decide whether the price on your LOI survives.
Why your audit won’t answer the question
Start with what an audit actually is. When your auditors sign off on your financials, they’re certifying one thing: that your statements fairly present what happened, under GAAP. It’s a compliance exercise, and a valuable one — it means the past was recorded correctly. But notice how narrow that is. An audit has no opinion about whether your largest customer is about to retire, whether you’re paying yourself half of what your replacement will cost, or whether last year’s banner quarter came from a project that will never repeat. Those things can all be true inside perfectly clean, GAAP-compliant financials.
A quality of earnings report exists to ask the question the audit doesn’t: how much does this business really earn, and will those earnings continue under a new owner?
The audit certifies the past. The QoE prices the future.
What the buyer’s team is actually doing in your numbers
The reason buyers care so much about that question comes down to simple arithmetic. Middle-market deals are priced as a multiple of EBITDA. If a buyer is paying six times earnings, every dollar of EBITDA carries six dollars of purchase price — and every dollar that turns out not to be durable costs them six. Before wiring millions against a number, they want an independent team to pressure-test it. Their lender, incidentally, wants the same thing; the financing will be sized off the QoE, not off your internal statements.
So a team of transaction-focused accountants spends several weeks in your numbers — typically the trailing two or three years plus the current interim period — and what they produce is, at its heart, one schedule: a bridge from your reported EBITDA to what they believe a new owner can actually count on. Owner compensation gets restated to market. Personal expenses come out. One-time items — the legal settlement, the insurance recovery, the windfall project — come out too. Then they go past the P&L entirely, into the questions that worry buyers most: how concentrated is the revenue, what’s actually under contract, how much cash does the business swallow in receivables and inventory through the year, and what investment has been quietly deferred to make recent earnings look their best.
The part we most want you to sit with
In a typical deal, this analysis is commissioned by the buyer, performed by the buyer’s advisors, after you’ve already agreed on price. Think about that sequencing. The LOI number was based on your presentation of the business. The QoE then tests it — and if a piece of your EBITDA doesn’t hold up, the price gets revisited. It is almost never revisited upward.
This is why we tell sellers, sometimes years before they plan to sell: the most valuable thing you can do is see your earnings the way a buyer’s diligence team will see them, before it counts. Sometimes that means a formal sell-side QoE before going to market, so the number you negotiate on is one that survives diligence. But it can start much simpler than that, tonight, with five questions.
Uncomfortable answers don’t mean the business isn’t sellable. They mean the gap between your reported earnings and your adjusted earnings is where the deal will be won or lost — and it’s far better to map that gap yourself than to have a buyer’s diligence team map it for you.
If a sale is 12 months out or less, the window for fixing things has mostly closed, but the window for framing them hasn’t: sell-side QoE work now means you go to market with a number that holds. If you’re one to three years out, this is the golden period — customer contracts can be signed, concentration reduced, compensation normalized, and clean monthly financials established, all before anyone is looking. And if you’re buying rather than selling, everything above works in your favor: never close without one.
The audit certifies the past; the QoE prices the future. Sellers who understand that early tend to keep the number on page one of the LOI. Sellers who learn it in week four of diligence usually don’t.
Chief Perspective performs quality of earnings analysis for buyers and sellers of middle-market companies as the core of its Quality of Earnings practice. If a transaction is on your horizon, let’s talk.
Common questions
How much does a QoE cost?
For middle-market companies, typically somewhere in the tens of thousands of dollars, scaling with the complexity of the business — multiple entities, messy books, or unusual revenue recognition all add work. Against the purchase-price math above, it is usually inexpensive insurance relative to the price it protects.
How long does it take?
Plan on four to six weeks from the document request to the final report, assuming your records are in reasonable shape. Slow document production is the most common cause of delay — and delays in diligence have a way of becoming renegotiations.
Is a QoE required?
No one mandates it, but virtually every institutional buyer and lender will insist on one. If your buyer doesn’t, their bank will.
Do I still need audited financials?
An audit and a QoE do different jobs, and having audited or reviewed statements makes the QoE faster and more credible. Think of the audit as the foundation and the QoE as the inspection before the sale.