The buy-side firm just ordered a Quality of Earnings (QofE) audit. What are they actually looking for, and where are they going to try to slash my EBITDA?

Question

Tyler Smith · Accepted Answer

A Quality of Earnings (QofE) audit is not a standard CPA tax audit; it is an aggressive forensic investigation designed to find reasons to chip away at your purchase price. The buy-side firm is digging for proof that your historical cash flows are neither stable nor repeatable.

They will focus heavily on normalized EBITDA. They are looking to slash your valuation by finding and reversing one-time revenue spikes, unrecorded liabilities, or understated expenses. For example, if you are underpaying yourself as the owner, they will adjust your EBITDA downward to reflect the true market rate of hiring a replacement CEO. They will also look for customer concentration risks - if one customer represents more than 15% of your revenue, expect them to demand a steep discount or structure a massive earnout to offset that risk.

To survive a QofE, you must be prepared with your own data. Do not let the buyer set the narrative. Run a sell-side QofE before going to market. This allows you to identify and defend your add-backs - such as personal auto leases, family members on payroll who do not work, or one-off legal fees - with bulletproof documentation. When you run your business on a clear operating system and track your weekly numbers in a Level 10 Meeting™, you possess the clean, historical data required to shut down buy-side attempts to grind down your EBITDA.