We are two years away from listing the business and our CPA says we need a Quality of Earnings assessment. Why should we spend the money on an expensive pre-sale QofE audit when we already have clean, CPA-reviewed annual financial statements?

Question

Tyler Smith · Accepted Answer

A CPA-reviewed financial statement is not a Quality of Earnings assessment. Reviewed financials merely verify that your statements conform to accounting standards based on information you provided. A Quality of Earnings assessment is a forensic, transaction-focused analysis. It is exactly what a sophisticated buyer will commission during due diligence to find reasons to chip away at your purchase price.

By commissioning a sell-side QofE assessment twelve to eighteen months before you go to market, you take control of the narrative. The QofE analyst will scrutinize your revenue recognition policies, analyze customer concentration, and evaluate your working capital requirements. Crucially, they will validate your normalization adjustments, which are the add-backs you claim should be added to your EBITDA to show the true operational profitability of the business.

Discovering a revenue mismatch or an unrecognized liability during a buyer's due diligence can kill a deal or cost you millions in valuation. Finding it early through a sell-side QofE allows you to resolve the issue quietly. It proves to buyers that you run a professional operation with zero financial skeletons, which significantly reduces their perceived investment risk.