The Seller's Guide to Surviving a Quality of Earnings Review

If a buyer is paying more than $1M for your business, there's a good chance they're getting a quality of earnings report. That means a CPA firm is going to spend 3–6 weeks going through your books with the specific goal of finding things that change the purchase price.

Most sellers find this process uncomfortable. Some find it threatening. A few lose deals because they weren't prepared for it.

Here's what actually happens in a QoE, what will and won't hurt you, and what you can do before the process starts to protect your deal.

What the QoE Team Is Actually Looking For

The buyer's QoE provider is not trying to find fraud. They're trying to answer a specific question: what does this business actually earn, and will it continue to earn that after the buyer takes over?

That means they'll verify that your revenue is real and correctly timed, assess which of your EBITDA adjustments are supportable, test your bank statements against your reported financials, analyze your working capital pattern, and identify any risks that could affect future earnings.

The findings fall into three categories: 1. Adjustments that reduce normalized EBITDA — items that will change the purchase price 2. Risks that affect deal structure — customer concentration, key-person dependency, contract assignability 3. Clean findings — the numbers hold up and the deal proceeds

Most QoE engagements produce all three. A QoE that finds nothing is rare. A QoE that blows up the deal is also rare. Most deals renegotiate modestly and close.

What Will Hurt You (and What Won't)

Things that commonly reduce the purchase price:

- Add-backs the broker included that can't be documented - Personal expenses that were run through the business without clear records - Revenue timing differences (cash collected but work not yet done, or vice versa) - Owner compensation that was understated — the buyer's side will normalize upward, which increases the replacement cost and reduces normalized EBITDA - Rent you're paying to yourself at below-market rates — the buyer will normalize rent to market, which may hurt more than help

Things that affect deal structure but not necessarily price:

- Customer concentration above 20–25% in one account - Key-person dependency (relationships tied to you personally) - Contracts that require customer consent to assign - Lease expiration within 12–18 months with no renewal agreement

Things that rarely matter as much as sellers fear:

- Normal year-to-year revenue fluctuations that have a clear explanation - Expenses that were genuinely one-time and are well-documented - Tax-basis accounting vs. accrual — as long as the QoE can reconcile them - Complexity in the business model — QoE providers work on complex businesses constantly

The Document Request List: Get Ahead of It

The QoE process starts with a document request. The buyer's CPA will ask for a long list of financial records. How quickly and completely you respond affects the timeline and the quality of the analysis.

Expect requests for:

- 3 years of P&L statements and balance sheets - 3 years of federal tax returns (business and personal) - 24–36 months of bank statements for all accounts - Payroll records - Accounts receivable aging reports (current and prior year-end) - Customer list with revenue by customer for the past 3 years - Copies of major contracts (top 5 customers, landlord, key suppliers) - Your EBITDA adjustment schedule with documentation for each add-back

Getting this organized before you go to market saves weeks. Sellers who hand over a well-organized financial package on day one compress the diligence timeline and project competence. Sellers who drip-feed documents over six weeks create delays, frustration, and suspicion.

Preparing Your Add-Back Schedule

The add-back schedule is the single most important document in the QoE process. It's your argument for why the business earns more than the reported EBITDA — and the QoE team will scrutinize every line.

For each add-back, have documentation:

- Owner compensation normalization: provide a job description that reflects what you actually do, and a comp survey or industry benchmark for what a replacement would cost - Personal vehicle expenses: provide the list of vehicles, their personal vs. business use percentages, and supporting mileage logs or schedules - One-time expenses: provide the invoice, a brief description of the specific event, and why it won't recur - Related-party transactions: provide the contract, the market rate for the same service, and any communications supporting the arrangement

The more documentation you have, the less the QoE team has to question. An undocumented add-back isn't automatically rejected — but it will get scrutinized, and if you can't support it during the fieldwork, it comes out.

The Management Call

At some point in the QoE process, the buyer's CPA team will want a management call. This is a structured interview about the business — revenue drivers, key customers, operational processes, what the owner actually does day-to-day.

This is not a trap. Answer honestly. The QoE team already has your bank statements and tax returns. They're not looking for inconsistencies to catch you on — they're looking to understand the business well enough to make an accurate assessment.

What to prepare for:

- Customer questions: Be ready to describe your top 5–10 customer relationships. How long have they been customers? How sticky is the relationship? What would happen if you left? - Owner role questions: Be specific about how you spend your time. The QoE team is trying to understand the replacement cost of your role — underestimating it doesn't help you, because the buyer will find out in their own analysis. - Revenue driver questions: Be prepared to explain any unusual revenue patterns — a spike in one year, a dip in another, seasonal patterns.

One thing sellers often get wrong: overpromising. Don't describe the pipeline as if it's contracted revenue. Don't describe relationships as more locked in than they are. The buyer is going to own this business — they'll find out the truth, and credibility matters.

The Sell-Side QoE Option

Increasingly, sellers are getting their own QoE done before going to market. This is called a sell-side or vendor quality of earnings.

The logic: you find the issues before the buyer does. You either fix them, explain them, or price them in from the start. No surprises in the middle of a deal.

A sell-side QoE also accelerates the deal timeline. Instead of the buyer's QoE taking 4–6 weeks in the middle of a transaction, the buyer can review your QoE (and potentially conduct a less intensive reliance review), compressing the timeline by weeks.

For businesses above $5M in purchase price, the investment in a sell-side QoE is almost always worth it. At $3M–$5M, it depends on how complex the financials are and how competitive the sale process is.

The main limitation: the buyer's lender may require their own independent QoE regardless. In SBA deals, the bank almost always requires the buyer to have their own analysis.

What Happens When the QoE Finds Something Real

Accept that the QoE will find something. The question is how significant it is.

If the findings are minor — a few adjustments that reduce the purchase price by $100K–$200K — accept them and move on. Fighting well-documented findings from a credible CPA firm damages your credibility, delays the deal, and rarely results in the buyer accepting the original number.

If the findings are significant — normalized EBITDA is materially below what you represented — you have options. You can provide additional documentation that supports your position. You can propose a deal structure that protects the buyer on the downside (earnout, escrow) while preserving your upside. Or you can walk away if the price no longer works for you.

The worst outcome is a seller who stalls, refuses to engage with the findings, and loses the deal at week ten after both parties have spent real money. If the QoE changes the economics significantly, have that conversation early.

A Note on Working With Bedrock as a Seller

If you're a seller and the buyer has engaged Bedrock, we will be professional, methodical, and focused on facts. We document our findings and explain our reasoning. If you have documentation that supports a position we've questioned, show it to us — we will update our analysis.

We're not advocates for any outcome. Our job is to tell the buyer what the business actually earns.

If you're interested in having Bedrock run a sell-side QoE before you go to market, reach out here. A clean QoE is one of the best tools a seller has.