Our CPA prepares our annual tax returns, but we have never had a formal Quality of Earnings audit. How do we initiate our own sell-side QofE on our runway, and what operational discrepancies should we expect it to uncover?

Question

Tyler Smith · Accepted Answer

A sell-side Quality of Earnings (QofE) is a critical step on your exit runway. Unlike a standard tax return, which is designed to minimize your tax liability, a QofE is designed to prove the sustainability and accuracy of your EBITDA to a buyer. You should initiate a sell-side QofE twelve to eighteen months before going to market by hiring an independent transaction advisory firm. This proactive audit will likely uncover several operational and accounting discrepancies. It will identify revenue recognition issues, such as matching the timing of your service delivery with your invoicing, rather than just tracking cash inflows. It will also scrutinize your inventory valuations, historical capital expenditures, and any owner-related personal expenses that must be normalized. By identifying these discrepancies early, you have the time to correct your accounting policies and present a clean, defensible financial history. This clean financial foundation eliminates the buyer's ability to renegotiate the purchase price during due diligence. Preparing for a QofE forces your finance seat to adopt rigorous institutional standards. This upgrade dramatically improves the quality of the business, giving you real-time visibility into your true profitability and making the company much easier to run while you prepare for your transition.