Key takeaways
- A QoE report is a negotiating document, not an audit opinion. Every adjustment the buyer's accountants propose is a position that can be accepted, disputed, or negotiated to a middle ground.
- The most commonly disputed QoE adjustments are addback disallowances, revenue timing adjustments, and normalized compensation estimates. These are also the adjustments with the most legitimate room for counter-argument.
- A $300K EBITDA adjustment at a 6x multiple is a $1.8M purchase price impact. Disputing adjustments is not nitpicking; it is protecting the majority of your sale proceeds.
- Sellers should retain their own accounting advisor to review the QoE report and build a written counter-analysis. Relying solely on the buyer's accountants to be objective is not a sound strategy.
- Not all QoE adjustments should be disputed. Accepting findings that are clearly correct, quickly and without argument, builds credibility for the disputes that matter.
$300K–$800K
Typical net EBITDA reduction from QoE adjustments in a middle market deal
6x–8x
Typical EBITDA multiple in lower middle market transactions
$1.8M–$6.4M
Purchase price impact of a $300K EBITDA adjustment at 6x–8x
40–60%
Of QoE adjustments that are negotiated from the buyer's initial position
The quality of earnings report arrives during diligence as a dense document full of accounting adjustments, normalization entries, and EBITDA restatements. For a founder who has been focused on managing their business through a sale process, reading a 40-page document that proposes to reduce trailing EBITDA by $600K is a disorienting experience.
The instinct is either to accept the findings and move on, or to reject all of them defensively. Neither is correct. The right response is a structured evaluation: identify which adjustments are legitimate, which are aggressive interpretations, and which are factually wrong, then build a written response that accepts the clearly correct, disputes the clearly wrong, and negotiates the gray areas.
The most common QoE adjustment categories
QoE accountants apply adjustments across a standard set of categories. Understanding each category makes it easier to evaluate the finding and build a counter-argument.
QoE adjustment categories and their disputability
Revenue normalization
Adjustments that move revenue out of the reported period if the accountants believe it was recognized early or inconsistently. Disputable when: the recognition methodology is consistent with prior periods and GAAP; the adjustment treats the company differently than industry practice; the accountants misunderstood the contract terms.
Addback disallowances
The buyer's accountants disagree with the seller's addback claims. The most common: they argue an owner expense is partially operational, a one-time item has recurred twice, or a legal expense reflects an ongoing operational issue rather than a non-recurring event. Disputable when: the addback is clearly non-operational; comparables support the classification; the seller has documentation.
Normalized owner compensation
The accountants replace actual owner compensation with a market-rate management salary, creating a negative adjustment if the owner was underpaid. Disputable when: the replacement salary estimate is above actual market for the role and geography; the owner performed multiple functions that would require multiple replacements.
Working capital add-ons
Adjustments to normalize one-time or unusual working capital items that inflated cash flow in the measurement period. Less commonly disputed because the evidence is usually in the financials.
Run-rate adjustments (positive or negative)
Accountants may adjust EBITDA for items that affect the forward run rate but are not in the trailing period: new customer contracts, lost contracts, pricing changes, new hires. These cut both ways and are highly negotiable.
Allocated corporate costs
If the business shares costs with another entity, the accountants may add back a portion of costs they believe are not fully represented in the reported financials. Disputable when the allocation methodology is inconsistent with how the business actually operates.
Ask the buyer's accountants for the supporting workpapers behind each adjustment. "We made a normalization adjustment to revenue" is not a sufficient basis for accepting a $400K EBITDA reduction. You are entitled to understand the specific transactions adjusted, the methodology applied, and the accounting authority cited.
How to build a counter-analysis
A counter-analysis is a written response to the QoE report that accepts certain adjustments, disputes others with supporting documentation, and proposes alternative treatments for gray areas. It should be prepared by the seller's accounting advisor, not by the founder.
Steps to build an effective QoE counter-analysis
Step 1: Categorize every adjustment
Sort each finding into three buckets: accept, dispute, negotiate. Do not dispute everything; selective disputes are more credible and more effective.
Step 2: Request supporting workpapers for disputed items
For every adjustment you intend to dispute, obtain the underlying calculation and identify the specific transactions the buyer's team adjusted.
Step 3: Pull your own supporting documentation
For addback disputes: vendor invoices, emails confirming one-time nature, board minutes approving one-time expenses. For revenue disputes: signed contracts, delivery documentation, prior-period recognition for comparable transactions.
Step 4: Research comparable accounting treatments
If the buyer's team is applying an unusually aggressive standard, document how comparable companies in your industry handle the same item. Industry-specific AICPA guidance and peer company financial statements are useful.
Step 5: Draft a written response memo
Present each disputed adjustment with: the buyer's position, your counter-position, the supporting evidence, and the proposed resolution. A professional memo from your advisor carries more weight than an email from the founder.
Step 6: Prioritize by dollar impact
Focus the negotiation on the three to five largest adjustments. A $250K addback dispute at 7x is a $1.75M price issue. A $12K normalization entry is not worth the relationship cost.
"A founder received a QoE report proposing a $720K net EBITDA reduction from eight adjustments. Their accounting advisor reviewed the report and categorized: three adjustments totaling $180K were clearly correct and were accepted immediately. Two adjustments totaling $310K were factually disputed with documentation: one addback for a one-time lease termination fee was incorrectly classified as recurring, and one revenue timing adjustment was based on a misreading of the contract. Two adjustments totaling $190K were gray areas negotiated to $95K. One adjustment of $40K was accepted after review. Net result: EBITDA reduced by $315K instead of $720K. At a 7x multiple, the difference was $2.8M of additional proceeds."
How QoE adjustments affect the purchase price mechanism
In most middle market transactions, the purchase price is a multiple of trailing twelve-month adjusted EBITDA as defined in the purchase agreement. The QoE report establishes what that adjusted EBITDA number is, which directly sets the purchase price.
If the LOI specified a 7x EBITDA multiple and the QoE report reduces EBITDA from $2.1M to $1.8M, the implied purchase price decreases from $14.7M to $12.6M. That $300K EBITDA adjustment is a $2.1M price reduction.
Some transactions have fixed purchase prices with no adjustment mechanism tied to the QoE. In those cases, QoE findings do not directly change the price, but they affect whether the buyer proceeds at all, whether they invoke MAC, and how aggressively they negotiate closing adjustments and escrow terms.
Understanding which mechanism applies to your transaction changes how you prioritize the QoE response. In a multiple-based deal, every dollar of EBITDA defense matters at the multiplier. In a fixed-price deal, the QoE response is more about preserving deal certainty and escrow terms than recovering the direct price calculation.
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Disclaimer: Financial figures and case studies in this article are illustrative, based on representative middle market assumptions, and are not guarantees of outcome. Statistical references are drawn from cited third-party research; individual transaction and operational results vary based on business characteristics, market conditions, and deal structure. This content is for informational purposes only and does not constitute legal, financial, or investment advice. Consult qualified advisors for guidance specific to your situation.
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