Quality of earnings provider

What this seat actually does

A quality of earnings review takes the seller’s reported profit apart and rebuilds it. It tests whether revenue is recurring or one-off, whether claimed addbacks are genuinely non-recurring or are simply costs the business will still have, whether margins are moving in the direction the seller says, how concentrated the customer base is, and what normalized working capital actually looks like.

That last point is where the money usually is. The working capital peg determines how much cash has to be left in the business at closing, and a peg set from an unexamined average can move the real price by a great deal without the headline number changing at all.

Sellers increasingly commission their own review before going to market. Done early, it finds the problems while there is still time to fix them, rather than having a buyer find them at the worst possible moment and reprice.

When you need one

As a buyer, after the letter of intent and inside exclusivity, on any acquisition of consequence. As a seller, a year or more before you intend to go to market.

How they charge

A fixed fee for a defined scope is common, scaled to the target’s size and the messiness of its records. Scope creep is normal and usually justified, because the messiness is itself a finding.

What to ask before you hire

• What is in scope and what is explicitly out?
• How do you treat addbacks the seller has proposed, and will you show me each one with your conclusion?
• How will you calculate a normalized working capital target, and over what period?
• What are the three things you most often find in businesses like this one?
• Will you speak to my lender directly, and are they likely to accept your report?

How to compare candidates

• Independence from the seller and from your banker matters. You want a report that can deliver bad news.
• Ask what they will NOT tell you. A QoE is not an audit and does not certify anything; knowing the limits keeps you from over-relying on it.
• Lender acceptance is practical and worth confirming in advance if debt is part of the structure.

The mistake owners make

Skipping it on a deal that feels friendly, or accepting the seller’s adjusted EBITDA because the seller seems honest. Claimed addbacks are not earnings until someone independent has tested them, and this has nothing to do with the seller’s character.

What this is not

Not an audit, not a valuation, and not a substitute for your own understanding of the business. It tests the numbers, not the strategy.

The Institute accepts no payment from any advisor, takes no fee tied to any transaction, and does not place or refer professionals for compensation. This entry describes a role, not a recommendation of any firm.