Sell-Side Quality of Earnings
The buyer's QoE advisor will adjust your reported earnings. The only question is whether you control the narrative before that adjustment happens or after. A sell-side QoE eliminates the retrade and puts the adjusted number in your hands.
QoE adjustments worked example — $1M revenue SMB
The following table applies a representative set of QoE adjustments to a $1M revenue business with $180K in reported net income. Each adjustment line item reflects a category that a buyer's QoE advisor will test. Understanding these adjustments before the buyer's team arrives is the entire value of a sell-side engagement.
Reported Net Income Starting point from the income statement — cash-basis, as filed. | $180,000 |
Add: Depreciation and Amortization Non-cash charge added back to move from net income to EBITDA. | + $45,000 |
Add: Interest Expense Financing cost added back — buyer will refinance on their own terms. | + $22,000 |
Add: Income Tax Expense Tax position normalizes post-close; added back to EBITDA. | + $38,000 |
Reported EBITDA Pre-adjustment EBITDA — this is the number the listing broker uses. It is not the number a buyer underwrites. | $285,000 |
Add: Owner Compensation Above Market Rate Owner pays themselves $250K; market-rate GM salary for this role is $155K. $95K added back as a non-market expense. | + $95,000 |
Add: Personal Expenses Run Through the Business Personal vehicle, personal travel, and personal insurance documented with receipts and added back. | + $28,000 |
Add: One-Time Legal Settlement (non-recurring) Single event — supplier dispute resolved in the current year. Not expected to recur; added back. | + $40,000 |
Deduct: Below-Market Office Rent from Related Party Owner's LLC charges the business $3K/mo; market rate is $6K/mo. $36K annual below-market benefit normalized out. | − $36,000 |
Deduct: Revenue Pulled Forward (year-end timing) Two contracts invoiced in December for work completed in January. Revenue deferred to match delivery period. | − $55,000 |
Deduct: Capitalized Repairs Buyer Will Expense Owner capitalized routine HVAC maintenance. Buyer's advisor will expense it; normalized to expense treatment. | − $18,000 |
| Adjusted EBITDA (QoE-Defensible) | $339,000 |
On a 4x–5x market multiple, the difference between the $285K reported EBITDA and the $339K adjusted EBITDA is $216K to $270K in transaction value — recovered through a sell-side QoE completed before the buyer's advisor arrives.
Four-week QoE engagement timeline
A sell-side QoE engagement is sequenced so that data collection and financial analysis run concurrently, narrative review follows analysis, and the final deliverable is ready before the business goes to market or before a buyer's letter of intent is received.
- Week 1 — Data collection and financial stagingGather three years of financial statements, tax returns, and supporting schedulesOwner-earnings schedule, related-party transaction list, revenue-by-customer breakdown, and depreciation schedule collected and organized. Accounting system export pulled and reconciled against filed returns.
- Week 2 — Adjustment identification and testingTest every potential adjustment line item against documentationEach add-back requires a supporting receipt, contract, or market-rate comparable. Each downward adjustment is verified against the underlying transaction. Undocumented adjustments are excluded from the final table.
- Week 3 — Adjusted EBITDA build and narrative draftConstruct the adjustment table and write the supporting narrativeThe adjustment table is formatted for buyer presentation. Each line item is accompanied by a one-sentence rationale. The narrative explains the business's earnings quality, revenue durability, and adjustment methodology.
- Week 4 — Review, stress-test, and final deliverableOwner review, advisor stress-test, and final QoE package deliveredOwner reviews each adjustment for accuracy and completeness. A second advisor stress-tests the adjustments against likely buyer objections. Final package delivered in a format ready for buyer distribution.
- Exit Readiness →
The QoE review is the financial backbone of the exit-readiness rubric — Financials dimension scores full points only with a completed QoE.
- Bookkeeping & Fractional CFO →
The Financial Engine maintains QoE-ready books continuously — so the sell-side engagement takes weeks, not months.
- Capital Readiness →
The same adjusted EBITDA and financial package that satisfies a QoE review satisfies a lender's underwriting requirements.
Frequently asked questions
What is a quality of earnings review?+
A quality-of-earnings review is an independent financial analysis that tests whether a business's reported earnings accurately reflect the true, normalized, and sustainable cash-generating capacity of the business. It adjusts reported EBITDA for non-recurring items, owner-specific expenses, accounting policy choices, and timing differences — producing an adjusted EBITDA figure that a buyer or lender can underwrite with confidence.
Who orders the quality of earnings review — buyer or seller?+
Historically, buyers order QoE reviews as part of their due diligence. Increasingly, sellers commission a sell-side QoE before marketing the business. A sell-side QoE compresses the buyer's diligence timeline, removes retrade risk, and gives the seller control of the narrative before the buyer's advisor can reframe it.
How much does a quality of earnings review typically adjust reported EBITDA?+
In our experience working with SMBs in the $500K–$5M revenue range, total adjustments range from 15% to 35% of reported EBITDA in either direction. The most common upward adjustments are owner compensation normalization and non-recurring expenses. The most common downward adjustments are revenue pulled forward through aggressive recognition and one-time gains treated as recurring.
Will the QoE review find problems I do not know about?+
Often yes. The review is designed to surface items that are accurate under GAAP but that a buyer's advisor will flag as quality concerns — inconsistent revenue recognition, related-party transactions at below-market rates, or expenses capitalized that a buyer will expense. Knowing before the buyer's team arrives is the entire value of the sell-side QoE.
Is a QoE review the same as an audit?+
No. An audit tests whether financial statements comply with GAAP and are free of material misstatement. A QoE review tests whether the earnings trajectory is real, sustainable, and attributable to the ongoing business — not to accounting choices, owner-specific arrangements, or one-time events. The two serve different purposes and are conducted by different types of advisors.
How do I prepare my financials for a QoE review?+
The core preparation steps are: three years of accrual-basis statements reconciled and current; a documented schedule of owner add-backs with supporting receipts; a list of all related-party transactions with market-rate comparables; and a revenue schedule broken out by customer and product line. Businesses that complete these four items before engaging a QoE advisor compress the engagement from four weeks to two.
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