Our M&A advisor recommends spending money on a sell-side Quality of Earnings report before we go to market, but our books are already reviewed annually by a CPA. Why should we pay for our own QofE, and how does it prevent purchase price retrading during diligence?

Question

Tyler Smith · Accepted Answer

A standard CPA audit or review looks backward to confirm whether your historical financial statements comply with GAAP. A buy-side Quality of Earnings report looks forward at cash sustainability, dissecting whether your reported EBITDA can actually be converted into cash flow by a new owner. If you wait for the buyer to perform the first QofE, their accounting firm is financially incentivized to find every possible earnings reduction to justify retrading your purchase price after you are locked into exclusivity.

Commissioning a sell-side QofE allows you to uncover and fix accounting vulnerabilities before buyers see them. The report analyzes revenue recognition timing, unbilled work in progress, proof of cash reconciliations, customer concentration shifts, and run-rate adjustments. More importantly, it validates and defends your pro-forma EBITDA add-backs, such as above-market owner compensation, one-time facility moves, or non-recurring legal disputes.

When you hand bidders a verified, third-party sell-side QofE as part of your confidential information memorandum, you anchor the valuation multiple to a defensible EBITDA baseline. The buyer letter of intent must explicitly reference the sell-side QofE adjusted EBITDA figure. If the buy-side diligence team later tries to shave earnings using standard audit technicalities, your deal team can push back using the pre-established documentation, eliminating the standard sixty-day retrade window.