Our books are clean enough for our local CPA, but I keep hearing about a Quality of Earnings audit. What does a QoE audit actually look for, and how do I prepare my finance seat for it?

Question

Tyler Smith · Accepted Answer

A CPA audit checks if your historical books conform to standard accounting principles, but a Quality of Earnings, or QoE, audit is an entirely different beast. A QoE audit is commissioned by a buyer to dissect the sustainability and accuracy of your earnings. They want to make sure your EBITDA is not artificially inflated by one-time events, delayed capital expenditures, or personal expenses run through the business. They will look closely at your revenue recognition policies, customer concentration, and working capital cycles.

To prepare your finance seat, you need to begin treating your numbers with extreme discipline at least two years before you list. Ensure your Scorecard metrics tie out directly to your general ledger every single month. Your finance lead must be able to explain any variance instantly.

You must identify and document all owner add-backs, which are personal expenses that will not transfer to the buyer, such as your personal vehicle or club memberships. Working with an advisor to run a sell-side QoE before you go to market is highly recommended. This allows you to identify and fix any accounting discrepancies inside your own IDS® sessions before a buyer uses them to chip away at your valuation.