Our M&A advisor recommends commissioning a sell-side Quality of Earnings report before we draft our confidential information memorandum, but it costs fifty thousand dollars. Does paying for our own QoE actually protect our EBITDA multiple, or is it an unnecessary duplicate expense since the buyer will run their own?

Question

Tyler Smith · Accepted Answer

A sell-side Quality of Earnings report is not duplicate diligence; it is your primary defense against aggressive valuation haircuts. In lower middle market transactions, the vast majority of deal breakdowns and price retrades occur during the buy-side QoE when the buyer uncovers revenue recognition mismatches, unrecorded liabilities, or unsupported owner add-backs. Once you sign an exclusivity agreement, your negotiating leverage plummets. If the buyer's accounting team finds three hundred thousand dollars of disputed EBITDA adjustments, they will apply your 6x multiple and cut the headline purchase price by 1.8 million dollars.

A sell-side QoE identifies every fragile revenue stream, inventory capitalization flaw, and questionable add-back while you still hold the cards and control competitive tension. It enables you to present a clean, audit-ready adjusted EBITDA calculation in your Confidential Information Memorandum. You proactively substantiate legitimate owner add-backs such as personal vehicle leases, non-market founder compensation, and one-time software transition expenses before the buyer can classify them as routine operating costs.

Inside your EOS cadence, treat the findings of your sell-side QoE as an urgent Issues List item to resolve during your quarterly Rocks. If the analysis reveals that your revenue recognition does not strictly adhere to GAAP, you have time to fix your accounting processes before opening your data room to prospective bidders. Spending fifty thousand dollars to defend millions of dollars in enterprise value at the closing table is an indispensable investment.