Our financials are clean, but we have never been through a sell-side Quality of Earnings assessment. How do we prepare our internal financial systems before we go to market so the buy-side QofE firm does not discover discrepancies that can be used to recontract the purchase price?

Question

Tyler Smith · Accepted Answer

Clean tax returns are not the same as a buy-side ready set of books. When a buyer hires an accounting firm to run a Quality of Earnings assessment, they are looking for reasons to reduce your adjusted EBITDA. To defend your valuation, you must pre-emptively clean up your accounting practices.

Start by aligning your revenue recognition policies with standard accounting principles. If you have been booking revenue when you invoice rather than when services are performed, you must run a retrospective reconciliation. Buyers will quickly write down your earnings if they find mismatched revenue and expenses.

Next, identify every single owner-related expense and personal add-back. You need bulletproof documentation for every personal auto lease, travel expense, and family member on the payroll. If you cannot back up an add-back with receipts and a clear business rationale, do not include it.

You should run your own sell-side analysis. Treat this as a major company Rock. Use your weekly Level 10 Meeting to review the progress of your financial cleanup.

By taking control of the data before the buyer sees it, you eliminate their ability to use accounting discrepancies to renegotiate the purchase price. A prepared seller who can explain every adjustment immediately commands respect and maintains leverage.