What a Quality of Earnings Provider Actually Tests First
Founders assume a quality of earnings review starts with revenue. It does not. By the time a good QoE analyst opens your revenue file, they have already formed a view of how much your reported EBITDA can be trusted, and they formed it from somewhere else entirely.
I have sat on both sides of enough of these to know the order, and the order is the tell. A QoE provider tests three things before they get anywhere near your top line, and each one is a place a founder can win or lose the number.
The first thing they test is the bridge from your books to your bank. Not your revenue, your cash. They tie your reported net income to the actual movement of money through your accounts, month by month, and they look for the gaps. Where did reported profit not turn into cash? A widening gap between accrual earnings and cash generation is the first flag, because it usually means revenue is being recognized ahead of collection, or expenses are being capitalized, or something is being timed to flatter a period. If your books reconcile cleanly to cash, the analyst relaxes. If they do not, everything after that is read with suspicion.
The second thing they test is the consistency of your accounting policy over time. Did you change how you recognize a contract, capitalize a cost, or accrue a bonus midway through the trailing period? Buyers do not object to a policy. They object to a policy that moved in the year before a sale, because it looks engineered. In our transaction dataset (https://dx.doi.org/10.2139/ssrn.6515478), revenue recognition and timing issues appeared in 31 percent of deals, with a median restatement of 5.1 percent of revenue. Almost none of those were fraud. They were policy inconsistencies the founder never thought to document.
The third thing they test, still before revenue, is your add-back schedule against your own bank records. Every founder normalizes EBITDA with add-backs: the owner's above-market salary, personal expenses run through the business, one-time legal costs, the failed product line. The analyst does not evaluate whether the add-back is reasonable in the abstract. They pull the underlying transactions and check whether it actually happened the way you described. Owner add-back restatements appeared in 47 percent of the deals we tracked, with a median EBITDA reduction of 8.3 percent. That is the single largest source of price erosion in the lower middle market, and it is entirely preventable.
Only after those three tests does the analyst turn to revenue itself: customer concentration, cohort retention, contracted versus one-time, and the durability of the top line.
Here is why the order matters to you. If you know a QoE provider tests cash conversion, policy consistency, and add-back substantiation first, you can build your own version of exactly those three schedules before the buyer orders their review. A sell-side quality of earnings memo, prepared by your own accountant twelve months out, does two things. It surfaces the problems while you still have time to fix or document them, and it signals to the buyer that your numbers were built to survive scrutiny rather than to impress a CIM reader.
I described the mechanics of pressure-testing that memo in how top exit advisors stress-test a quality of earnings report before filing, and the reason it matters to price in the diligence question most founders never see coming. The through-line is the same: the review is predictable, and predictable work can be done in advance.
The founders who hold their EBITDA through diligence are not the ones with the cleanest story in the CIM. They are the ones who tested their own numbers the way the buyer's analyst will, in the same order, before the analyst ever showed up. That is preparation, not accounting, and it is the difference between a QoE review that confirms your number and one that quietly takes eight percent of it. We build that readiness with founders before a process starts at Cordis Group.