Why Sell Side QoE Pays Off
Strong financial records do more than answer a buyer’s questions. They allow founders to spend the sale process explaining what makes their company valuable instead of defending EBITDA adjustments, accounting methods, and working capital figures. In this video, M&A advisor Kirk Michie explains why a sell-side quality of earnings report can be one of the highest-return investments a founder makes before going to market.
Preparing to sell a business often begins long before an investment banker starts contacting potential buyers. Effective business exit planning may require six to eighteen months of internal preparation before a company formally goes to market.
Founders can use that time to professionalize financial reporting, reduce customer concentration, organize supplier and partner contracts, prepare a data room, and identify growth opportunities that may make the company more attractive to buyers. A sell-side quality of earnings analysis and stronger documentation can also help buyers better understand the company’s historical performance and transferable economics.
Buyers consider more than a company’s past results when determining valuation. They are also evaluating the future opportunities available after the acquisition. According to M&A advisor Kirk Michie, preparing those elements before beginning the sale process can help founders pursue a higher valuation, stronger deal terms, and greater control over their legacy after the transaction.
What Is a Sell-Side Quality of Earnings Report?
A sell-side quality of earnings report, often called a sell-side QoE, is an independent review of a company’s financial performance before it goes to market.
The review is typically completed by a CPA or financial advisory firm. It helps present a clear and supportable view of the company’s earnings, accounting practices, EBITDA adjustments, and other financial details a buyer will examine.
A sell-side QoE may also include a net working capital calculation. This helps establish the normal amount of working capital the company needs to operate and can reduce disputes about working capital during a sale.
Why Buyers Review Quality of Earnings
Most serious buyers will conduct their own financial review. This is known as a buy-side quality of earnings analysis.
The buyer’s advisors may examine:
Revenue recognition
Cash and accrual accounting methods
EBITDA calculations
Owner-related expenses
Nonrecurring costs
Proposed EBITDA add-backs
Net working capital
Trends that could affect future earnings
If the seller’s financial records are incomplete or difficult to support, these issues can consume a large part of due diligence.
Unclear Financials Can Distract Buyers
Founders want to spend buyer meetings discussing the company’s strengths, growth opportunities, customers, and competitive advantages.
Instead, weak financial preparation can force them to defend their books. Buyers may question whether add-backs are valid, whether revenue was recorded correctly, or whether reported earnings reflect the company’s true performance.
Those doubts can distract from the company’s story and may weaken a buyer’s confidence in the deal.
A sell-side QoE helps address many of these questions before buyers begin their review. It gives the seller a chance to find problems, support adjustments, and present the company’s financial performance more clearly.
Is a Sell-Side QoE Worth the Cost?
A quality of earnings report requires a real investment. The cost varies based on the company’s size, financial complexity, and the scope of the review. Kirk notes that many lower-middle-market companies may spend approximately $25,000 to $50,000.
For founders preparing for a sale, the return can be significant. Better financial preparation may lead to:
Fewer surprises during due diligence
More credible EBITDA adjustments
Clearer net working capital expectations
More productive conversations with buyers
Less risk of financial questions delaying the deal
Transaction advisors and M&A attorneys may also be able to introduce founders to accounting firms that regularly perform this work.
Prepare Before Going to Market
A sell-side QoE does not replace a strong sale process, but it can create a more credible financial foundation for one.
Candor Advisors helps founders prepare for market, understand what their business may be worth, and connect with qualified professionals who can complete quality of earnings work. To discuss your company or a possible sale with Kirk Michie, visit Candor Advisors and select “Talk to Kirk.”
