Sell-Side Quality of Earnings Report: Worth It?

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By Michael D. Rubin, CEO & Founder · November 2026 · 1,605 words

If your company is heading toward private equity or other sophisticated buyers, expect a quality of earnings review either way. The real question is whether the first one is yours or the buyer’s. A sell-side quality of earnings report, ordered from an independent accounting firm before you go to market, is usually worth it when your adjusted EBITDA rests on many add-backs, your books are kept on a cash or tax basis, or your earnings jumped in the last year. For a company with clean accrual financials and few adjustments, a careful recast and well-organized records can do most of the same work for less.

Either way the goal is the same: no number in your offer should be one the buyer’s accountants will later take apart.

What a quality of earnings report is

A quality of earnings report is a review by an outside accounting firm of whether the earnings a buyer is paying for are real, repeatable and correctly measured. It is not an audit. An audit gives an opinion on whether your financial statements follow accounting standards. A quality of earnings review is aimed at one number, adjusted EBITDA (earnings before interest, taxes, depreciation and amortization, after removing owner perks and one-time items), and tests it month by month.

It matters because that number sets your price. Buyers of companies in the lower middle market most often price a business as a multiple of adjusted EBITDA, so every dollar the review accepts or rejects is multiplied. Our article on how add-backs affect private company value explains the adjustments the review will test.

Adjusted EBITDA by month and for the trailing twelve months, reconciled to your tax returns and bank statements.
Every add-back, checked against invoices, payroll records and agreements.
Revenue: when it is recorded, how concentrated it is among customers, and how much of it recurs.
Gross margin by product or service line, and how it has moved.
Net working capital by month, which is used to set the working capital target in the purchase agreement.
Debt and debt-like items such as customer deposits, deferred revenue, unpaid bonuses and deferred maintenance.
Proof of cash: whether the cash that came into the bank matches the revenue on the statements.

Why the buyer’s review moves your price

A buyer signs a letter of intent at a price based on the earnings you presented. During the exclusivity period that follows, its accountants test those earnings. Any part of your adjusted EBITDA they cannot verify comes off the price at the same multiple. As simple arithmetic: at five times EBITDA, a $200,000 add-back the accountants reject is a $1 million reduction in price.

And by then you have no other buyers at the table. That is how most price cuts after a letter of intent happen, and why a disputed review is one of the common reasons deals fail outright. Our articles on preventing a buyer from cutting the price before closing and on why business sales fail in due diligence cover the rest of that risk. Buyers also use the review to set the working capital target, which changes the cash you receive at closing; see how working capital affects the purchase price.

When a sell-side report is worth ordering

Your situation	Sell-side report?	Why
Many add-backs: owner pay, personal expenses, one-time legal or repair costs	Usually yes	Each one is tested in advance, so buyers start from a verified number
Books kept on a cash or tax basis	Usually yes	Buyers measure on an accrual basis; the conversion is done on your terms, before anyone is exclusive
Earnings rose sharply in the last twelve months	Usually yes	Buyers discount sudden growth unless an independent review explains it
Private equity buyers expected in a competitive process	Often	Several buyers compare offers on the same verified number, and their own review goes faster
Reviewed or audited accrual statements with few adjustments	Often not	A documented recast and organized records do most of the work
A smaller sale to an individual buyer using bank financing	Rarely	The cost weighs heavily against the deal size; the lender sets its own requirements

What a sell-side report will not do

It will not stop the buyer from ordering its own. Most private equity groups and their lenders commission a review regardless. A good sell-side report makes theirs faster and leaves fewer surprises for them to find.
It will not make weak earnings strong. It measures what is there. If the earnings will not hold up, it is better to learn that before buyers do and fix it, or price it in.
It is not a valuation. It tests earnings; it does not say what buyers will pay for them. That still depends on your industry, your risks and how many buyers compete. Our business valuation page explains the difference.
It costs money whether or not you sell, paid to the accounting firm that prepares it.
Its findings are yours to deal with. A problem it uncovers has to be fixed, explained or disclosed. Found early, that is a conversation you control.

What the review tends to find in owner-run companies

Most of what a quality of earnings review questions in a privately held company is not wrongdoing. It is the ordinary way an owner runs a business he never expected anyone else to examine line by line. These are the items that most often change the number.

Owner pay that is added back in full. A buyer will replace you with a manager who has to be paid. Only the difference between your pay and a market salary for that role is a fair add-back.
One-time costs that recur. A lawsuit, a big repair or a recruiting push is one-time once. If something similar appears every year, the review treats it as a normal cost of doing business.
Revenue recorded when the cash arrived. On a cash basis, a large job paid in December can make one year look stronger and the next weaker. Converting to accrual moves revenue to when it was earned.
Family members and related parties. Relatives on payroll, rent paid to a building the owner owns, purchases from a related company. The review restates each one at a market rate, up or down.
Expenses that were skipped. Deferred maintenance, a vacant position or an unusually low marketing year flatter earnings. A buyer will budget to catch up, and the review says so.
Inventory and receivables nobody has counted. Old stock and invoices that will never be collected are written down, which lowers both earnings and working capital.

Choosing the accounting firm

If you decide to order a sell-side report, the firm matters as much as the decision. Buyers give weight to a report from a firm that regularly does transaction work for buyers and lenders, because they know its methods. Ask any firm you consider how many sell-side and buy-side reviews it completed last year, for companies of your size and in your industry; who on its team will actually do the work; what it will need from you and your bookkeeper; and whether it is independent of your regular CPA. Your outside CPA knows your books best, but buyers usually expect the review to come from someone who did not prepare them.

How to prepare even if you never order one

Every buyer will ask the same questions a quality of earnings review asks. Preparing the answers is worth doing whatever you decide, and it is most of what makes a review go smoothly.

Monthly financial statements on an accrual basis for the last three years and the current year.
A reconciliation of those statements to your tax returns and bank statements.
A file for every add-back: the invoice, payroll record or agreement that proves it.
Personal and family expenses taken out of the company now, so fewer adjustments are needed later.
Revenue by customer by month, so concentration and recurring revenue can be shown, not argued.
Accounts receivable aging, inventory counts and a list of customer deposits and deferred revenue.
A short written explanation of every unusual year or one-time event.

Our checklists of the financial statements needed for a business valuation and the documents to organize before selling go through each item. Timing matters too: if you order a sell-side report, have it finished before the confidential information memorandum is written, so the numbers buyers see first are the verified ones.

How we approach it

Every engagement with us starts with a financial recast: we restate your profit to remove owner perks, one-time costs and non-market salaries, and that recast is the basis of the free, confidential opinion of value we give owners before they decide to sell. While we build it, we can tell you plainly whether your numbers are likely to survive a buyer’s review, and whether a sell-side report is worth the money for your company or whether cleanup is enough.

When cleanup is needed, our pre-exit consulting gets the records in order before you go to market. A quality of earnings report itself is prepared by an independent accounting firm; its value to buyers comes from that independence. Our role is to make sure the numbers in your marketing materials are the ones that hold up, and to keep several buyers competing while they are tested. MDR & Associates has closed more than 250 transactions since 2008, and our sell-side representation is paid by success fee only.

If you are a year or two from selling and want to know how your earnings will read to a buyer, schedule a confidential conversation, or start with a free snapshot valuation.

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Questions owners ask next

How is a quality of earnings report different from an audit?

An audit gives an opinion on whether your financial statements follow accounting standards. A quality of earnings review tests whether your adjusted EBITDA is real and repeatable, month by month, because that is the number a buyer prices.

Will a buyer accept my sell-side report instead of doing its own?

Some buyers may rely on it, but most private equity groups and their lenders order their own review. A thorough sell-side report still shortens their work and reduces the chance of a price cut after the letter of intent.

Who pays for a quality of earnings report?

Whoever orders it. The seller pays for a sell-side report; the buyer pays for its own review.

Can a quality of earnings report raise my price?

It does not create earnings, but it can protect the price you were offered, and a careful review sometimes documents adjustments the owner had missed. Its main value is that buyers have less reason to cut the price later.

Should I get a quality of earnings report before I sell my company?