What the seller presents: “We did $1.5M of EBITDA last year. Here’s the P&L, and here are the addbacks, my truck, my wife’s salary, the one-time legal thing. Really it’s more like $1.8M.”

What the QoE finds: some of those addbacks are real, some evaporate under a light, and a few costs the seller never mentioned are actually recurring. The $1.8M becomes $1.35M, and since the price was a multiple of EBITDA, the whole deal just got repriced. This is the single most common way a signed LOI turns into a renegotiation or a walk.

What a quality-of-earnings review actually is

A QoE is a third-party accounting firm re-deriving a target’s sustainable, normalized EBITDA from primary records, bank statements, ledgers, invoices, payroll, rather than accepting the seller’s P&L at face value. It is not an audit (it’s not certifying the financials are correct); it’s a diligence exercise answering one question: if I buy this stream of earnings, how much of it will actually still be here next year?

For any acquisition financed with senior debt, a QoE is effectively mandatory, the lender is sizing leverage off this number, so the lender wants it validated by someone who doesn’t work for the seller.

The four things a QoE stress-tests

1. Are the addbacks real? Sellers add back expenses they claim won’t continue under new ownership. The QoE sorts them into survives / doesn’t:

  • Survives: the owner’s above-market salary (you’ll pay a market manager less), a genuinely one-time legal settlement, a discontinued product line’s losses.
  • Doesn’t: “marketing we can cut,” normal equipment repairs dressed up as one-time, family members on payroll who actually do necessary work, or owner perks that a real operator will still have to spend money to replace.

This is deep enough that it deserves its own treatment, the line between addbacks that survive diligence and addbacks that don’t.

2. Is the revenue real and durable? The QoE tests revenue recognition timing (did they pull next year’s sales into this year?), customer concentration (one client at 40% is a risk discount, not a strength), and whether recent growth is a trend or a one-off spike. Contracted or recurring revenue survives; lumpy project revenue gets viewed skeptically.

3. Is the working capital normal? A seller can flatter cash flow by stretching payables and squeezing receivables right before a sale. The QoE normalizes working capital, which feeds directly into the working-capital peg negotiation, the part of the deal first-time buyers always lose.

4. Are there costs hiding off the books? Deferred maintenance, under-market rent from a related party (that resets when you buy), a key employee who’s been underpaid and will leave without a raise. These are real go-forward costs the reported EBITDA ignores.

Why the number almost always comes down

It’s structural, not adversarial. The seller has spent months assembling the most favorable defensible version of their earnings. The QoE’s job is to remove everything that isn’t sustainable and add everything the seller conveniently forgot. Directionally, that pushes one way. A QoE that raises EBITDA happens, but it’s rare, and a buyer who has modeled the deal assuming the seller’s number holds has modeled a deal that probably doesn’t exist.

What it means for your financing

Because the lender sizes debt off the QoE number, a downward revision does two things at once: it lowers the price you should pay (good) and it lowers the debt the deal supports (which can blow a hole in your capital stack if you’d counted on the higher number). This is why experienced acquirers don’t finalize the stack until the QoE lands, and why the pro forma EBITDA the lender uses is always the scrubbed number, never the pitch number.

How to be ready

If you’re the buyer, insist on a QoE even on smaller deals. It’s cheap insurance against overpaying. If you’re an owner who might sell or be acquired, run a “sell-side QoE” on yourself first: clean books, defensible addbacks documented, no surprises. A seller whose numbers survive diligence untouched closes faster and at a better price, because they’ve removed the single biggest source of last-minute renegotiation.

Run your own file first

Want to know which of your addbacks would survive a QoE, before a buyer’s accountant tells you? Run the assessment or send us your documents and we’ll read it the way a credit team would.

Educational only. Nothing here is an offer of credit, a commitment to lend, accounting advice, or advice on any specific transaction.