Why Sellers Should Complete a Quality of Earnings Before Going to Market

22 Jul 2026 Why Sellers Should Complete a Quality of Earnings Before Going to Market

Authored by Steve Avis

In today’s competitive mergers and acquisitions environment, preparation often determines whether a transaction closes smoothly or stalls under scrutiny. One of the most effective ways a seller can prepare and retain control of the transaction story is through a Quality of Earnings (QoE) analysis completed before going to market. While traditionally viewed as a buyer-side diligence exercise, QoE has become a critical sell-side tool for business owners seeking to maximize value, establish credibility, and shape expectations from the outset.

A Quality of Earnings analysis evaluates the sustainability, accuracy, and consistency of a company’s earnings. Unlike historical financial statements, which focus on compliance with accounting standards, QoE assesses whether reported earnings reflect ongoing operations and sustainable cash-generating ability. This analysis forms the foundation upon which valuation, deal structure, and financing decisions are built.

Historically, QoE analyses were initiated after a letter of intent was signed, often uncovering issues late in the process. Today, many sellers commission a sell-side QoE before launching a transaction. This proactive approach allows potential issues to be identified and addressed early, rather than surfaced by buyers under compressed diligence timelines. Advancing the analysis enables sellers to frame their financial story on their own terms, rather than reacting to buyer-driven conclusions that can disrupt momentum.

Valuation in most M&A transactions is driven by a multiple of EBITDA or similar earnings metrics. QoE normalizes earnings by identifying non-recurring, non-operational, or discretionary items that may distort reported results. Common adjustments include excess owner compensation, one-time professional fees, litigation settlements, non-recurring consulting costs, or unusual related-party transactions. This process clarifies the level of sustainable earnings going forward.

A QoE also brings discipline to earnings add-backs by distinguishing legitimate, repeatable adjustments from those buyers are unlikely to accept. While sellers may use add-backs as an opportunity to increase valuation, unsupported or aggressive adjustments can undermine credibility and delay negotiations. A third-party QoE adds objectivity and provides a defensible framework for buyers, lenders, and advisors during diligence. This discipline often strengthens the seller’s negotiating position.

In M&A transactions, credibility is currency. Buyers rely on accurate financial information, especially in competitive processes with tight diligence timelines. Sellers who present a well-prepared QoE demonstrate transparency, professionalism, and readiness. This often leads to fewer follow-up questions, faster diligence cycles, and smoother negotiations, while narrowing gaps between buyer and seller expectations.

QoE analyses also provide insight beyond earnings normalization. They reveal risks that can affect deal structure, such as customer concentration, margin volatility, revenue cut-off practices, working capital trends, or seasonality that may not appear in summary financial statements. Identifying these issues early, before going to market, allows sellers to address them proactively through operational improvements, enhanced disclosures, or strategic deal structuring.

In active middle-market regions such as Utah, where founder-led businesses, private equity capital, and strategic acquirers increasingly compete for quality assets, transactions often move quickly with limited tolerance for uncertainty. Sellers who enter the market with a well-supported earnings narrative are better positioned to maintain momentum and protect value during diligence.

Investment bankers and intermediaries increasingly rely on sell-side QoE reports to support confidential information memoranda and management presentations. When financial data is supported by a rigorous analysis, marketing materials become more persuasive and defensible, and buyers are better positioned to underwrite offers with confidence. This often leads to a more efficient process and greater certainty of close.

While a Quality of Earnings analysis requires time and resources, it should be seen as a strategic investment rather than a transaction cost. As buyers continue to become more sophisticated and selective, sellers who prepare early and present high-quality financial information gain a significant advantage. For many transactions, owning the narrative before going to market is not only prudent – it is decisive.

To arrange for a QoE engagement, contact Haynie today.