Definition. An independent financial analysis commissioned by the buyer (and increasingly by the seller, in advance, as a defensive measure) that adjusts reported EBITDA for non-recurring items, owner add-backs, accounting irregularities, and other distortions, producing a normalized EBITDA number that the buyer uses to apply their multiple.
The QofE is the single most consequential document in most lower-middle-market diligence processes. The QofE team will spend three to six weeks reviewing the management financials, reconciling them to tax returns and bank records, and producing an adjusted EBITDA number that the buyer treats as the real number for pricing purposes.
A sell-side QofE (commissioned by the seller in advance of going to market) typically reduces the negotiation surface in diligence by 30% to 60% because the seller’s adjustments have already been vetted by an independent accounting firm before the buyer arrives. The cost of a sell-side QofE is $40K to $120K depending on business complexity; the typical return is 5x to 30x that in preserved enterprise value.