A QoE decides which of your add-backs survive. That schedule, not the multiple, is where most of the negotiation actually happens.
- It is not an audit. An audit asks whether the statements follow the rules; a QoE asks how much of this profit is still here next year under a new owner
- Owner compensation is the most common error: SDE adds back your whole salary, EBITDA adds back only the amount above a market rate for the job
- Recurring costs dressed as one-time is the most consistently rejected add-back category
- Proof of cash does not detect fraud — FORVIS Mazars says so plainly; it surfaces unusual transactions that need investigating
- Diligence is slow and getting slower: IBBA and M&A Source reported the $5–10M segment averaging 5.5 months, a record high
- Most QoE statistics you will read are unverifiable. The widely quoted 28% / 24% deal-failure split attributed to IBBA is actually a 107-person Axial survey
What a QoE Is, and What It Is Not
A quality of earnings report is a focused accounting analysis of whether the profit a business reports is real, repeatable, and transferable. Owners frequently assume it is a light audit, and the distinction matters because the two answer different questions. An audit tests whether financial statements comply with accounting standards. A QoE asks a commercial question that no accounting standard addresses: how much of this profit will still exist next year, under different ownership, without you in the building.
The deliverable is a normalized EBITDA figure plus a schedule showing every adjustment made to get there from your reported earnings. That schedule is the document your price gets negotiated against. Owners tend to focus on the multiple because it is the number that sounds like it matters, but a half-turn of multiple on $2 million of EBITDA is $1 million, and so is a $500,000 haircut to EBITDA at a 2x difference in what survives. The adjustment schedule is where a large share of real negotiation happens, and it is the part most sellers have never seen before their own deal.
Our guide to EBITDA and business valuation basics covers how adjusted earnings are constructed. This article covers what happens when someone independent tests that construction.
What It Costs, and Why Every Published Price Should Be Read Carefully
Published cost figures for a sell-side QoE on a lower middle market business cluster around $25,000 to $50,000, with a typical timeline of four to six weeks from engagement to draft. Smaller engagements below roughly $3 million of EBITDA are quoted nearer $15,000 to $25,000, and larger or multi-entity businesses run from $50,000 to $75,000 and upward.
Those ranges deserve a caveat we would rather state than bury. Nearly every published QoE price you will find online is posted by a firm that sells QoE engagements. They are rate cards, not survey data, and the spread across sources is wide enough that some of the variation is positioning rather than genuine market difference. We use them because they are the best available, not because they are independent.
| Sell-Side QoE | Buy-Side QoE | |
|---|---|---|
| Who commissions it | The seller | The acquirer |
| When | Before going to market | After the letter of intent |
| Who pays | The seller | The buyer |
| What it is built to do | Withstand challenge | Find the challenge |
| Who the accountant's client is | You | The person trying to pay you less |
| What happens when it finds something | You fix it or explain it, with every buyer still at the table | Price gets revisited, with one buyer holding exclusivity |
The commissioning and timing distinctions above follow the standard description used across accounting firms, including RKL. The last two rows are our characterization, not a cited finding.
The cost sits inside a longer clock than most owners expect. IBBA and M&A Source Market Pulse data reported that due diligence in the $5 million to $10 million segment averaged 5.5 months, described as a record high. Diligence is not getting faster. Every week of it is a week you are running your business while answering questions about it, and performance during diligence is itself something buyers watch.
Who This Article Is For
This is for owners of businesses roughly in the $2 million to $75 million revenue range, generally with at least $500,000 of adjusted EBITDA, who are either preparing to sell or already in a process and have just been told a QoE is coming. If you have never sold a business before, you are in the majority: IBBA and M&A Source reported that individual buyers accounted for 44% of lower middle market acquisitions in the fourth quarter of 2025, with 26% being first-time buyers and private equity roughly 20%. Most of the people on the other side of your deal have done this more often than you have, and the QoE is where that experience gap shows up most expensively.
What a QoE Actually Finds
Generic descriptions of QoE work are useless to a seller. What follows is the specific mechanism of each adjustment category, because knowing that recurring costs get scrutinized is worthless next to knowing exactly why yours will not survive. The category framework here follows the adjustment taxonomy published by Bonadio; the failure modes are our own.
Owner Compensation: The Most Expensive Misunderstanding
This is the error we see most, and it is definitional rather than dishonest. Two conventions exist for handling what the owner takes out of the business, and they produce very different numbers.
Under seller's discretionary earnings, the owner's entire compensation is added back to profit, on the logic that a buyer stepping into the owner's role captures the whole salary. Under EBITDA, only the portion above a market-rate salary for the work actually performed is added back, because a buyer still has to pay somebody to do the job.
Concretely: you take $300,000, and a general manager doing your actual job would cost $200,000. An SDE presentation adds back $300,000. An EBITDA presentation adds back $100,000. That is a $200,000 difference in earnings, and at a 5x multiple it is a million dollars of enterprise value that was never there. Owners who build a price expectation from an SDE-style add-back and then negotiate against an EBITDA multiple are wrong before the first meeting, and the QoE is where they find out.
Recurring Costs Dressed as One-Time
This is the most consistently rejected category. The test a QoE applies is not what the invoice is labeled; it is whether the cost appears again. A consulting engagement that shows up in three consecutive years is recurring, whatever the description says. Legal fees are non-recurring only if the underlying matter is genuinely resolved. A software implementation is one-time; the annual subscription that follows it is not.
The compounding damage matters more than any single rejected line. When a provider disallows two or three add-backs as improperly characterized, they begin testing everything else more aggressively, and legitimate adjustments start getting challenged because your schedule has lost credibility. An aggressive add-back schedule does not merely fail on its weakest items; it weakens the strong ones.
Revenue Recognition and Cut-Off
Cut-off testing checks whether revenue landed in the period it belongs to. Recording a December shipment that delivered in January inflates the year buyers are underwriting, and a QoE will move it. This is rarely deliberate and frequently expensive, because owners on cash-basis or hybrid books often have no consistent policy at all. Where revenue is recognized over time, or where deposits and prepayments are involved, the analysis gets harder and the range of defensible answers gets wider — which is exactly the situation where having your own report first is worth the money.
Reserves, Inventory, and Related-Party Arrangements
Reserves get tested against history. An inventory reserve that has not moved in four years while inventory aged is an understated cost, and a warranty reserve that does not reflect actual claims is the same problem in a different account. Both raise reported EBITDA today by deferring a real cost.
Related-party arrangements are where the largest single adjustment usually appears, and rent is the most common. If your operating company pays rent to an entity you own, that rent is almost certainly not at market. Below-market rent inflates the operating company's earnings; above-market rent understates them. A QoE normalizes it to market either way, because after closing the buyer pays a real landlord or pays you under a real lease. Sector guides on our site cover how large this can get: it is the dominant adjustment in childcare and daycare valuations, where owners frequently own their buildings.
Proof of Cash, and the Limit Nobody Advertises
A proof of cash reconciles what the books say against what the bank shows, unwinding movements in receivables and payables to test whether money actually moved as recorded. It is genuinely good at catching timing problems, transfers between accounts that obscure activity, and nonstandard journal entries.
It is worth being precise about what it does not do, because the marketing around QoEs frequently implies otherwise. FORVIS Mazars states directly that proof of cash alone cannot tell you whether fraud exists. What it does is surface unusual transactions that require further investigation. A fraud constructed so the accounting stays internally consistent — fictitious revenue matched by fictitious receivables — reconciles cleanly. A QoE is a test of earnings quality, not a fraud examination, and any provider implying otherwise is overselling.
The Claims About QoEs That Do Not Survive Checking
We spent a meaningful part of the research for this article trying to verify the statistics that appear in nearly every QoE article online. Most of them could not be traced to a primary source. Since those numbers are frequently quoted at sellers to justify a fee, the failures are worth naming individually.
| Widely repeated claim | What we actually found |
|---|---|
| Deal failures split roughly 28% valuation expectations vs. 24% diligence findings, “per IBBA Market Pulse” | Not IBBA. The figures come from a survey of 107 lower middle market participants conducted by Axial. IBBA Market Pulse publishes multiples, buyer mix, and timelines — we found no IBBA breakdown of failure causes at these percentages. |
| 60% to 80% of QoE-supported deals get repriced | Traced to secondary citation without an accessible primary study. Repricing plainly happens; the rate is not established. |
| A QoE typically adjusts EBITDA by 10% to 30% | Appears in many provider and advisor articles with no primary research behind it. Reads as an industry assumption that became a statistic through repetition. |
| A sell-side QoE adds $500,000 to $2 million to the sale price | Provider marketing. No independent outcome study found. |
| A sell-side QoE lifts the multiple by 0.5x to 1.5x | No control-group study located. Case-study marketing. |
| Deals without a QoE average 4.2x EBITDA; QoE-backed deals reach 5.1x | Attributed to transaction databases in secondary articles, but the primary source was not accessible and could not be confirmed. |
We are not arguing that a sell-side QoE is a bad idea. We are arguing that the case for one should be made on a mechanism you can verify rather than a statistic you cannot. The defensible case is this: a QoE finds what it finds regardless of who commissions it. Commissioning it yourself changes when you learn the answer, and therefore how much leverage you have when you respond. Finding a $400,000 revenue recognition problem while five buyers are competing is a fixable inconvenience. Finding it after one buyer holds a signed letter of intent and exclusivity is a price renegotiation you will mostly lose. That argument does not need a percentage attached.
How This Plays Out by Sector
- Childcare and early education. Rent normalization dominates, because owners so often own the buildings. See childcare and daycare valuation multiples.
- Managed IT services. The scrutiny lands on revenue recognition across contract terms and whether recurring revenue is genuinely contracted and assignable. See MSP valuation multiples.
- Industrials and manufacturing. Inventory reserves and the line between maintenance and growth capital expenditure carry the analysis, since EBITDA ignores reinvestment a manufacturer cannot avoid. See our guide to manufacturing M&A advisors.
- Business services. Contracted versus project revenue, and whether customer relationships survive the owner's departure. See our guide to business services M&A advisors.
- Across all of them, customer concentration surfaces in the QoE even though it is not an accounting adjustment, because it determines how much of the earnings a buyer will treat as durable. Our guide on what buyers look for in an acquisition target covers the thresholds.
Where the Published Material Ends and Our View Begins
Almost everything published about quality of earnings is written by firms that sell quality of earnings engagements. That does not make it wrong, and the mechanical descriptions in this article draw on exactly those sources, because accounting firms are the people who know how the work is done. It does mean the promotional claims — the multiple uplift, the added proceeds, the repricing rates — should be read as advertising until someone publishes a study, and as of this writing nobody has.
What we can tell you from doing this work: the QoE is where optimistic add-back schedules go to die, and the sellers who do best are the ones who never built one. A defensible schedule with fewer, well-documented adjustments consistently outperforms an aggressive one, because credibility is cumulative across the whole document. We would rather talk you out of three weak add-backs than watch a provider use them to discredit the seven good ones.
Jack and Connor Pitts handle this work directly. You are not passed to a junior team after an intro call, and we do not charge an upfront retainer for standard M&A engagements — we are paid a success fee when a deal closes. That structure lets us give a candid read early, including when the honest answer is that your books need a clean year before you go to market at all.
Preparing So the QoE Does Not Cost You Money
The work that protects you happens well before anyone is engaged. Move to accrual-basis financials and close your months on a consistent schedule. Stop running personal expenses through the business at least a full year before going to market, so the year buyers underwrite is already clean rather than heavily adjusted. Document each add-back to an invoice when it occurs, rather than reconstructing the story a year later under deadline. Separate related-party arrangements and find out what market rent on your building actually is before a buyer tells you.
None of that is fast, which is why it belongs in the window described in our guide on when to start exit planning, and why it is worth understanding how a lower middle market sale process unfolds before you are inside one.