A founder is on a Wednesday call with their broker, mid-diligence, learning that the buyer’s Quality of Earnings adviser has just rejected three quarters of the founder compensation add back, all of the charity contributions, and most of the lease normalisation. The advance work the founder thought was conservative is being relabelled aggressive in real time. The deal is being repriced live, while she is still on speakerphone in her own office.
She had assumed the multiple was the negotiation. The QoE is the second negotiation, and the one that quietly does most of the work.
What is a Quality of Earnings analysis really testing?
The QoE is not a financial audit, it is a sustainability test. It asks whether reported earnings would continue under new ownership, with the founder removed from the picture. The auditor’s question is “are these books accurate”. The QoE adviser’s question is “are these earnings real, repeatable, and transferable”. They are different questions and they produce different conclusions.
Anders CPA describes the QoE plainly in their methodology guide. “A Quality of Earnings report evaluates whether the company’s reported earnings accurately reflect sustainable operating performance, typically adjusting EBITDA for items that are dependent on founder presence.” The adviser reviews revenue quality, analyses working capital trends, and assesses whether the earnings will continue post-acquisition.
In a founder-dependent business, the answer is almost always that some portion of the EBITDA is at risk. Not because the books are wrong, but because the activity producing the earnings is concentrated in one person. The QoE adviser’s job is to size that exposure and reflect it in the EBITDA the buyer underwrites.
This is also where customer concentration starts to do quiet work in the model. Where 60 percent of revenue is delivered through founder relationships, the QoE adviser does not strike that revenue out, but they normalise the EBITDA downward to the revenue that would credibly survive an ownership transfer. The founder reads this as the buyer being mean. It is more accurately the buyer’s investment committee asking the question they always ask.
Which add backs hold and which collapse?
Add backs survive a QoE if they are non-recurring, cleanly documented, and defensibly outside the operating norm. They collapse if they are routine, poorly documented, or favourable to the seller in ways the buyer can challenge. The categories that fail most often are predictable, and most founders have at least one of them in the package they prepare.
Above-market founder compensation often partially holds. If the founder draws £400,000 against a role that would cost £200,000 to fill at market rate, £200,000 of the difference can survive as a defensible add back. The other £200,000 typically gets rejected because the role itself genuinely commands that compensation. The math has to be defensible on its own terms.
Charitable contributions, owner-discretionary expenses, and personal-lifestyle items run through the business almost universally collapse. Above-market lease payments to a founder-owned property company partially survive, with the buyer’s adviser typically reducing the add back to the difference between actual rent and market rent for an equivalent unit.
Project-bound consulting fees, one-time legal expenses, and clearly non-recurring items hold up best. The pattern is that the QoE accepts what would not happen again under new ownership and rejects what is structurally part of the operation.
What does the math actually look like?
A composite scenario from advisory data illustrates the shape. A consultancy presented to its buyer with £1.2m of normalised EBITDA, based on £300,000 in claimed add backs across founder compensation, owner expenses, lease normalisation, and one-time consulting fees. During the QoE, the buyer’s team scrutinised each line independently. The result is the kind of quiet repricing the founder rarely sees coming.
£80,000 in claimed founder compensation add backs was rejected because the compensation expense was at market rate for the role. £60,000 in claimed one-time consulting expenses was accepted as non-recurring. £40,000 in claimed owner-discretionary charitable contributions was rejected. £120,000 in claimed above-market office lease, paid to the founder’s personal property company, was partially rejected on the grounds that market rent would be £40,000 less.
The QoE analysis reduced acceptable add backs from £300,000 to approximately £140,000. That pulled normalised EBITDA from £1.2m down to £1.04m. The valuation at the negotiated multiple compressed from the headline offer by approximately 13 percent.
The seller had believed they had prepared and submitted defensible add backs. They had not. The buyer’s advisers applied substantially more stringent scrutiny than the seller had anticipated, and the seller did not have the time to rebuild the case mid-deal.
Why is QoE scrutiny intensifying?
Quality of Earnings discrepancies caused 21.3 percent of failed transactions in 2025, the second largest single category after non-QoE diligence findings at 25.3 percent. The 2025 figure is more than double the 2023 rate. Buyer scrutiny on earnings quality is becoming more rigorous, not less. The Axial Dead Deal Report is a good barometer for the trend.
The DueDilio 2026 report on owner readiness adds the operational reality underneath. Customer concentration above 25 percent emerges in 42 percent of deals. Declining or flat revenue trends adjusted for inflation appear in 38 percent of deals. Key employee departure risk surfaces in 31 percent. These are basic facts about the business that should be known by the seller and often are not fully acknowledged until the QoE surfaces them.
The implication for a founder preparing to exit is straightforward. The QoE is not a one-off hurdle that catches careless sellers. It is a structural part of every credible deal above £500,000 in value, and the standard it applies is rising. The advance work is no longer optional.
What does early preparation look like?
The remedy is timing. A founder who works through the QoE checklist with their accountant or M&A adviser 18 months out can document the add backs the buyer will accept and set aside the ones they will not. The work is unglamorous. It is also the difference between the QoE arriving as confirmation and the QoE arriving as a surprise.
Practical sequence. Engage an accountant or part-time CFO who has seen the inside of a QoE. Walk every claimed add back through the test of “would this still be a cost under new ownership at market rate”. Remove anything that fails the test. Document anything that holds with contemporaneous records and a clear basis. Begin moving the founder compensation toward market rate during the preparation window so the gap to be claimed is smaller and more defensible.
The reframe is the most useful piece. The QoE is not the buyer being difficult. It is the buyer doing what their investment committee will require regardless of how friendly the conversations have been. Founders who prepare for it inside that frame keep substantially more of the headline number.
Closing
Most of the value at risk in a deal sits between the headline multiple and the QoE-adjusted EBITDA the buyer is willing to underwrite. The first number is on the cover page, the second is in the spreadsheet that quietly recalibrates the first.
If you would like to walk through what your own QoE preparation might look like, the conversation is short and specific. Book a conversation.
