Who pays for the QoE?

On a buy-side engagement the buyer commissions and pays for the QoE. Sellers increasingly run their own sell-side QoE first to get ahead of the issues and support their asking price.

How does a QoE change the deal price?

Because price is a multiple of Adjusted EBITDA, a QoE that trims EBITDA moves the purchase price by a multiple of the adjustment. Disallowing $2M of add-backs at 6.0x takes $12M off the price.

Quality of Earnings (QoE) - What It Tests & Why It Moves Price

Q: What is a Quality of Earnings report?

A focused diligence study, usually performed by an accounting firm, that tests whether a target's reported earnings are real, sustainable, and correctly stated. It normalizes EBITDA, scrutinizes add-backs, and probes revenue recognition, customer concentration, and margin trends.

A Quality of Earnings (QoE) is a focused diligence study, usually performed by an accounting firm, that tests whether reported earnings are real, sustainable, and correctly stated. It normalizes EBITDA, scrutinizes the add-backs, and probes revenue recognition, customer concentration, and margin trends. It is not an audit; it is a buyer's deep read of whether the earnings will actually repeat under new ownership.

Why it matters

The QoE is where the number the whole deal is priced on gets validated or cut. Because price is a multiple of Adjusted EBITDA, a QoE that trims EBITDA can move the purchase price by a multiple of the adjustment. It is also where a buyer surfaces the quieter risks, a single customer carrying the margin, revenue pulled forward, or a "one-time" cost that turns out to recur every year.

Worked example

When the QoE trims EBITDA

Management presents $25M of Adjusted EBITDA. The QoE disallows $2M of aggressive add-backs, leaving $23M. At 6.0x, that finding is worth $12M off the price: the difference between a $150M deal and a $138M deal, identified before signing rather than discovered after.

The common mistake

Relying on management's adjusted figures without independent QoE work, and underwriting a price to add-backs that diligence will not support. The QoE also reaches into the balance sheet, informing the working capital peg and the net working capital assumptions, so a thin QoE leaves risk in both the price and the close-date true-up.