Should we pay for a sell-side Quality of Earnings report before taking our business to market, or is that an unnecessary expense when buyers will perform their own anyway?

Question

Tyler Smith · Accepted Answer

Commissioning a sell-side Quality of Earnings (QofE) report is one of the highest-return investments you can make 12 to 24 months before entering the market. While buyers will still hire their own forensic accounting firm, a sell-side QofE allows you to uncover operational and financial red flags on your terms instead of defending against them in the middle of closing negotiations.

Buyers make money by finding inconsistencies. When their accounting team discovers unrecorded liabilities, misclassified expenses, revenue recognition errors, or unsupported owner add-backs during exclusivity, they use those discoveries to re-trade the purchase price or demand onerous escrow holdbacks. You lose leverage because you are deep in the process and walking away is painful.

A sell-side QofE gives you an objective, GAAP-adjusted baseline of your true normalized EBITDA. It rigorously tests working capital cycles, deferred revenue, and customer margins. If the auditor finds that a legacy software expense was improperly capitalized or gross margin was overstated due to improper inventory accounting, you fix the underlying operational process immediately. You also enter due diligence with a documented, defensible data room that commands credibility.

When you hand a prospective buyer a third-party sell-side QofE alongside your Scorecard and three-year V/TO, you signal institutional maturity. You strip away their primary justification for lowering enterprise value, shorten the diligence timeline, and keep competitive tension among bidding parties intact.