We keep hearing that a Quality of Earnings review can destroy a deal during due diligence. How do we prepare our financial data and run a pre-sale dry run to ensure our adjusted EBITDA holds up under intense scrutiny?

Question

Tyler Smith · Accepted Answer

A Quality of Earnings review is where transactions go to die. Unlike a standard audit, a buyer's QofE focus is on the sustainability and accuracy of your historical earnings. They will scrutinize every adjustment and add-back you claim. To defend your valuation, you must run a sell-side QofE before going to market.

First, clean up your financial reporting. Transition your books to strict GAAP compliance if you have not already. This means properly matching revenue and expenses in the correct periods, which is a major pain point for lifestyle-run businesses. Second, meticulously document your EBITDA add-backs. Every personal expense, one-time legal fee, or non-recurring operational cost must have a clear paper trail. If you claim an owner salary adjustment, prove the market rate replacement cost using your Accountability Chart roles.

Third, conduct a Step by Step Exit Business Integrity Review to identify operational vulnerabilities that a buy-side forensic accountant will exploit to discount your cash flows. For example, if your customer concentration is high or your contract management is disorganized, the buyer will use the QofE to argue that your earnings are high-risk, driving down your multiple. By identifying and correcting these financial and operational leaks early, you present a clean, institutional-grade business that leaves no room for the buyer to renegotiate the purchase price at the eleventh hour.