Our investment banker is recommending we pay for a sell-side Quality of Earnings report before we draft our marketing materials. How does spending money on a sell-side QofE up front prevent the buyer from retrading our valuation during their own due diligence?

Question

Tyler Smith · Accepted Answer

A sell-side Quality of Earnings review is an audit-like assessment of your historical financial performance, but it focuses on EBITDA quality rather than just GAAP compliance. Paying for this report before you launch your marketing process is a strategic move that neutralizes the buyer ability to retrade the purchase price during due diligence.

When a buyer submits an Letter of Intent, they base their valuation multiple on the financial data you provided. If their buy-side accountants discover inconsistencies in your revenue recognition, unrecorded liabilities, or unsupported add-backs, they will immediately chip away at your valuation. By performing a sell-side QofE first, you identify and resolve these financial discrepancies on your own terms.

Your sell-side QofE firm will analyze your customer concentration, gross margin trends, and working capital requirements. This allows you to build a clean data room and present a highly defensible EBITDA figure. If there are accounting weaknesses, you can correct them or proactively explain them in your confidential information memorandum.

This process also establishes your working capital peg early. Buyers often use the net working capital calculation as a tool to claw back cash at closing. Having a pre-calculated, defensible working capital history prevents them from setting an artificially high peg.

Ultimately, a sell-side QofE signals to buyers that you are prepared and disciplined. It reduces the due diligence window, which limits the time a buyer has to find excuses to lower their offer.