Preparing for Quality of Earnings (QoE) Long Before the Deal -

If you talk to founders who’ve been through M&A — or listen to almost any episode of the Legacy Advisors Podcast — one phrase comes up more and more often during diligence discussions:

Quality of Earnings (QoE).

QoE has become a standard component of professional diligence. And while most founders are familiar with the concept, far fewer are fully prepared for how deeply QoE impacts valuation, deal structure, and timeline once buyers get serious.

At Legacy Advisors, we see QoE as one of the most controllable — and most neglected — areas of exit preparation. The founders who proactively prepare for QoE long before they take their company to market are the ones who avoid re-trading, close deals faster, and command better structures.

In this article, I’ll break down what QoE really is, why buyers care so much, where founders often get blindsided, and how you can prepare your business to pass QoE with confidence long before buyers ever engage.

What Is a Quality of Earnings Review?

Let’s define QoE simply:

Quality of Earnings (QoE) is the buyer’s deep-dive financial analysis designed to verify the accuracy, sustainability, and normalization of your company’s EBITDA and cash flow.

This is not a financial audit. It’s not focused on GAAP compliance for tax filings or public company reporting.

QoE is hyper-focused on:

Normalizing EBITDA
Validating recurring vs. one-time revenue
Analyzing margin consistency
Scrubbing non-recurring expenses
Evaluating customer concentration risk
Reviewing contract structures
Identifying working capital trends

In short, QoE is how buyers make sure the “EBITDA” they’re paying a multiple on actually holds water.

Why QoE Is the Buyer’s Safety Net

Put yourself in the buyer’s shoes:

They’re paying you 5, 7, 10+ times your stated EBITDA.
Every $100K misstatement costs them $500K to $1M in real purchase price.

The buyer’s diligence team (or their lender’s diligence team) uses QoE to:

Validate valuation assumptions
Protect against downside surprises
Reduce integration risk
Inform deal structure (earnouts, escrows, holdbacks)

The cleaner your QoE result, the stronger your negotiating position throughout the entire deal process.

The Founder’s False Comfort: “Our Financials Are Clean”

I see this mistake often with founder-led businesses:

“Our books are GAAP-compliant.”
“We’ve had clean audits.”
“Our CPA firm handles our financials.”

All great — but none of that guarantees QoE readiness.

Why?

Because QoE asks fundamentally different questions:

Financial Audit	QoE Review
Did you follow accounting rules?	Is EBITDA accurately stated for acquisition pricing?
Are taxes filed properly?	Are revenue and margins sustainable?
Are financial statements reconciled?	Are customer contracts properly reflected?
Are policies documented?	Are addbacks defensible?

QoE digs into the economic reality behind your reported numbers — and that’s where many founders get caught off-guard.

Where QoE Blows Up Deals (or at Least Valuations)

Here are the most common QoE landmines that derail deal confidence:

Aggressive or unsupported EBITDA addbacks
Revenue recognition mismatches (timing vs. delivery vs. cash receipt)
Customer concentration not disclosed early
Inconsistent gross margin reporting by product or customer segment
Related-party transactions not clearly disclosed
Poor working capital management or fluctuations
Owner compensation and discretionary expenses not properly normalized
Deferred revenue improperly stated (especially in SaaS deals)

Each issue erodes buyer trust — and that erosion gets reflected directly in valuation, structure, and closing timeline.

Real Deal Example: The Cost of Weak QoE Prep

At Button Holdings, we reviewed a company with strong surface-level financials:

$6M EBITDA
30% YoY growth
Solid customer base

But during QoE:

Over $800K in addbacks were deemed unsupported
Deferred revenue was overstated by $500K
Certain COGS allocations were inconsistent across periods

The result? Normalized EBITDA was adjusted down to $4.7M — a 22% reduction.

At a 7x multiple, that wiped nearly $9M off enterprise value.

Worse? The issues surfaced late in diligence, damaging trust and forcing multiple painful deal structure changes.

The Cost of QoE Surprises

Beyond pure valuation impact, QoE issues lead to:

Extended diligence timelines
More detailed reps and warranties
Increased holdback and escrow amounts
Larger portions of purchase price tied to earnouts
Higher indemnity caps
Even full deal abandonment if issues feel systemic

Buyers simply don’t reward uncertainty.

The Legacy Advisors Rule: Treat QoE as Part of Exit Prep — Not Diligence

We coach founders to begin QoE prep 12–24 months before taking their company to market.

Why so early?

You control timing and pacing.
You can fix issues quietly before buyers see them.
You create a fully packaged, buyer-ready narrative.
You minimize diligence surprises that shift deal structure.

Early QoE preparation is not a cost — it’s an investment in maximizing both valuation and deal certainty.

How We Prepare Founders for QoE

At Legacy Advisors, our QoE-readiness framework includes:

1️⃣ Pre-QoE Self-Audit

Revenue recognition policies reviewed and documented
Customer contracts mapped to reported revenue
Margin analysis broken out by product, customer, and segment
All addbacks cataloged with full supporting documentation

2️⃣ Working Capital Normalization

Analyze AR, AP, inventory trends over multiple periods
Identify seasonal vs. structural working capital swings
Prepare buyer-ready working capital peg analysis

3️⃣ Addback Workbook

Build a fully reconciled EBITDA normalization schedule
Document each addback category, amount, and rationale
Preemptively address “grey area” adjustments buyers will challenge

4️⃣ Third-Party QoE Dry Run

Hire a reputable QoE firm for an internal report
Simulate buyer-style analysis 6–12 months before going to market
Use results to clean up issues before buyers ever see them

5️⃣ Founder Presentation Coaching

Teach founders how to tell the financial story with discipline
Align management team behind consistent messaging
Prevent nervous ad-libbing during buyer Q&A

Podcast Insight: The Risk of Surprises in Late-Stage Diligence

As I’ve shared many times with founders — and something we touched on in multiple Legacy Advisors Podcast episodes — the worst QoE outcomes aren’t always deal-killers.

The worst QoE outcome is late-stage surprises that break trust after the LOI.

At that stage, buyers have leverage. They can force painful price adjustments, structure changes, or simply walk away knowing you’ve already psychologically committed to the sale.

Prepping early for QoE removes those surprises — and keeps founders in control.

The Buyer’s Playbook: Why They Rely Heavily on QoE

Buyers view QoE as their final valuation insurance policy because:

The purchase price math is EBITDA-driven.
Every dollar of EBITDA directly affects millions in enterprise value.
Lenders require QoE validation for financing approval.
Board committees expect data-backed diligence before signing off.

The better your QoE readiness, the stronger your leverage with both buyers and their financing sources.

The Private Equity Lens on QoE

PE funds take QoE extremely seriously because:

Debt providers require it before funding LBOs.
Their own LPs expect diligence discipline.
Post-close integration teams rely on QoE findings for operational handoffs.

In many lower middle market PE deals, a clean QoE report can actually expand buyer pool options because multiple sponsors and lenders will feel comfortable bidding.

Case Study: How Early QoE Prep Unlocked a Superior Exit

We advised a SaaS founder with $10M ARR preparing for exit.

Before launching a formal process, we:

Conducted a full internal QoE review 9 months in advance
Cleaned up revenue recognition timing issues
Documented addbacks with clear contractual support
Analyzed customer retention by cohort
Normalized working capital across seasonality swings

When buyers engaged:

There were zero material QoE adjustments.
All buyers underwrote to the same EBITDA number.
Multiple sponsors submitted full-cash offers with limited structure.

The business sold at 1.5 turns above initial valuation targets — entirely because of deal confidence driven by financial clarity.

The Founder Mindset Shift

Founders often approach QoE with a defensive mindset:

“We’ll deal with that once diligence starts.”

Instead, adopt this proactive approach:

“We’ll prepare for QoE before buyers even show up.”

By doing so, you:

Control the narrative
Eliminate post-LOI surprises
Accelerate closing timelines
Reduce buyer risk premiums
Strengthen your negotiating leverage

Final Thoughts

Quality of Earnings isn’t just a diligence step. It’s a deal-shaping mechanism.

The founders who succeed in today’s M&A market:

Don’t treat QoE as a formality.
Don’t assume clean books mean ready books.
Don’t wait for buyers to point out the issues.

They prepare early. They preempt challenges. They deliver financial stories buyers believe.

Because in M&A, the best way to win top valuation isn’t defending your numbers — it’s preventing buyers from ever needing to doubt them.

Frequently Asked Questions About Preparing for Quality of Earnings (QoE) Long Before the Deal

What exactly is a Quality of Earnings (QoE) review in M&A?

Quality of Earnings (QoE) is a deep financial analysis performed by the buyer (or their advisors) during diligence to validate the company’s true earning power. Unlike a financial audit, which focuses on compliance and tax reporting, QoE focuses on normalizing EBITDA, confirming revenue recognition practices, identifying one-time or non-recurring expenses, analyzing customer concentration, and evaluating margin consistency. As Ed Button, Jr. routinely emphasizes at Legacy Advisors, QoE essentially verifies whether the EBITDA number being used to calculate purchase price is truly sustainable and repeatable post-acquisition.

Why is QoE so critical for buyers in private company M&A?

Because buyers typically base their valuation — and often their financing structure — on a multiple of EBITDA. Every dollar of overstated EBITDA directly inflates purchase price, which dramatically increases buyer risk. QoE gives buyers confidence that they’re not overpaying and that the financial picture presented in CIMs and management meetings actually reflects real, sustainable earnings. QoE also helps buyers avoid post-close surprises that could impact cash flow, integration plans, or their ability to service acquisition debt. A clean QoE report is often what allows buyers to move forward confidently with larger cash payments and lighter deal structures.

When should founders begin preparing for QoE?

Founders should start preparing for QoE 12 to 24 months before formally entering the market. Many QoE issues stem from multi-year inconsistencies — whether it’s revenue recognition, customer contracts, margin shifts, or working capital swings. By starting early, founders can identify and correct discrepancies long before buyers review financials. As Ed teaches at Legacy Advisors, early preparation allows founders to control the narrative, minimize diligence surprises, and present a fully defendable EBITDA story when the buyer’s QoE team engages. Late-stage financial cleanups during diligence often signal risk and erode buyer confidence.

What are the most common issues that derail QoE and lower valuation?

The most frequent deal-killers uncovered during QoE include:

Unsupported or overly aggressive EBITDA addbacks
Deferred revenue recognition mistakes (especially for SaaS businesses)
Poorly documented customer contracts
Unexplained margin swings across periods
Owner or related-party transactions not properly disclosed
Customer concentration risk not fully presented upfront
Seasonal working capital fluctuations not normalized
Any of these issues can lead buyers to lower purchase price, increase earnouts, or demand larger escrows — even if they don’t walk away entirely. Many of these problems are completely avoidable with early QoE prep.

How does QoE preparation improve deal structure and negotiating leverage?

The cleaner and more defensible your QoE result, the more confidence buyers have — which directly impacts both price and structure. A strong QoE outcome allows buyers to:

Offer larger cash payments at close
Reduce or eliminate earnouts
Minimize escrow and holdback amounts
Shorten diligence timelines
Simplify reps & warranties coverage
Buyers pay premiums for certainty. As Ed emphasizes repeatedly, founders who invest in QoE preparation don’t just close better — they negotiate from strength and control the outcome of their own exit.