If you’ve ever played poker with a professional, you know the feeling: you’re pretty sure your hand is decent, but somehow the pro keeps nudging the pot in their direction with a quiet cough, a raised eyebrow, or a casual “mind if we slow‑roll that last bet?”
Selling a business to a private‑equity (PE) buyer can feel the same way. You walk in thinking your EBITDA is strong, your revenue trend looks healthy, and the deal should close at the headline multiple you discussed a month ago. Then the buyer’s accountants drop a 70‑page Quality‑of‑Earnings (QoE) report on the table, and suddenly the conversation is about “normalizing adjustments” instead of growth potential.
QoE isn’t a dirty word; when done well, it’s a sanity check that protects both parties. But in the real world, it also doubles as the PE firm’s favorite playbook for shaving a half‑turn—or three—off the purchase price. Below are six classic “excuses” that creep into QoE reports, what they really mean, and how you can disarm them before they cost you a few million dollars.
1. The “One‑Time” Addback Adventure
The Excuse: “Your EBITDA overstates earnings because these expenses are recurring.”
How It Works
Sellers love addbacks—severance, lawsuit settlements, pandemic pivot costs—anything you can label “non‑recurring” to prop up adjusted EBITDA. PE diligence teams flip the script: they comb through GL details to argue the opposite. Conference sponsorships from two years in a row? Suddenly “recurring branding spend.” Founder’s travel to the same trade show each spring? “Annual operating cost.”
Your Counterplay
Build your own addback schedule long before the buyer shows up. Document why each cost truly won’t recur (i.e., a terminated product line, a closed facility, a one‑off ERP implementation). Provide invoices, board minutes—whatever evidence proves the expense died a natural death. The stronger your narrative, the harder it is for the QoE team to label it “recurring.”
2. Working‑Capital Whodunit
The Excuse: “Your business systematically under‑invests in working capital; we need a bigger peg.”
How It Works
PE buyers want assurance they won’t have to inject fresh cash on Day 1. If your payables stretch beyond industry norms or your inventory turns lag, the QoE report may claim you’re starving the business to dress up free cash flow—cue a larger working‑capital adjustment that reduces equity value dollar‑for‑dollar.
Your Counterplay
Track monthly working‑capital metrics at least a year before a sale process. Benchmark them against public comps. If DSOs spiked only because one big customer paid late, say so—and show the subsequent catch‑up. Better yet, set an internal “target net working‑capital” model early and manage toward it; buyers will have fewer levers to pull.
3. Revenue‑Recognition Reality Check
The Excuse: “Revenue is front‑loaded; let’s defer a chunk and haircut EBITDA.”
How It Works
Software and project‑based businesses are sitting ducks. Maybe you invoice 40 percent upfront on multi‑year contracts. Perfectly legal under GAAP? Perhaps. But a PE QoE team might assert you’re overly aggressive, arguing revenue should be recognized ratably. Each month deferred knocks down the top line and, by extension, adjusted EBITDA.
Your Counterplay
Obtain an outside technical memo (from a Big 4 or reputable boutique) confirming your revenue policy. If you can, provide a sensitivity analysis: “Even under straight‑line recognition, LTM EBITDA falls only 4 percent.” You might still negotiate, but you’ll do it from a position of fact, not conjecture.
4. Hidden‑CapEx Conundrum
The Excuse: “Maintenance capital expenditure requirements are understated; true free cash flow is lower.”
How It Works
PE firms buy on future cash yield, not just accounting profit. If your plant manager delays replacing machinery or your IT team keeps servers on life support, diligence flags “deferred maintenance.” Expect line items for catch‑up CapEx to appear in the QoE, thus reducing valuation multiples or prompting an escrow.
Your Counterplay
Keep a rolling five‑year CapEx plan and update it quarterly. Show proof of routine replacements. If you truly have a step‑change CapEx coming (new facility, major re‑platform), quantify it and weave it into your negotiation early, not later when it looks like you’re hiding the ball.
5. Customer‑Concentration Conflation
The Excuse: “Losing one customer would crater earnings; we’ll knock down the price to compensate.”
How It Works
A QoE report often bundles operational risk with financial numbers. If 25 percent of revenue comes from a single client, buyers may apply a “concentration discount” or demand seller financing to bridge the risk period.
Your Counterplay
Provide evidence of sticky relationships—multi‑year contracts, renewal histories, switching costs. Better still, line up reference calls in advance so the buyer hears confidence directly from the customer’s mouth. If churn has historically been low, arm yourself with data; don’t rely on anecdotes.
6. Forecast Fatigue
The Excuse: “Management projections are optimistic; let’s base value on LTM performance plus a conservative growth rate.”
How It Works
PE investors rarely pay for upside they haven’t personally vetted. The QoE team tests your budget assumptions: sales‑pipeline quality, pricing trends, cost‑inflation realities. If your forecast shows 20 percent CAGR but industry comps grow 8 percent, expect a haircut faster than you can say “sensitivity analysis.”
Your Counterplay
Build a bottoms‑up model that ties every incremental dollar to a real sales rep, a real product, or a real market expansion initiative. Stress‑test it publicly—invite your bankers, your CFO, even your skeptical board member—and record the feedback. When the QoE accountants come knocking, you’ll have a data‑driven story, not a hockey‑stick dream.
Putting the Playbook in Your Hands
None of these QoE “excuses” are inherently unfair. In fact, many surface legitimate issues sellers should care about. But if you leave them unaddressed until the buyer’s auditors find them, you give the PE firm ammo to renegotiate late in the game—right when momentum and auction leverage are working against you.
Here’s a simple three‑step approach to stay in control:
Run a Sell‑Side QoE Early
Think of it as pre‑game scouting. A reputable accounting firm will spot the same land mines—revenue cut‑offs, capitalized labor, related‑party charges—that a buyer’s team will seize on. Yes, you’ll spend six figures, but you’ll also walk into management presentations armed with answers instead of surprise.
Document, Don’t Debate
Private equity professionals respect paper trails. Board approvals, customer letters, audit‑committee minutes, technical accounting memos—all of it creates a factual backbone. When the buyer’s QoE partner challenges an addback, you produce documentation rather than a defensive anecdote.
Keep the Narrative Tight
Investors don’t just buy numbers; they buy confidence. Present your adjusted EBITDA, your working‑capital logic, and your CapEx story the same way across your banker’s teaser, the confidential information memorandum, and every PowerPoint slide thereafter. Mixed messages breed doubt; doubt breeds discounts.
Why PE Still Matters (and Why QoE Will Always Be Here)
Lest this sound like a villain monologue, remember that PE firms aren’t out to get you—at least, not irrationally. They tailor leverage, professionalize governance, and often fuel the next leg of growth. QoE is their version of a pre‑flight safety check: lower the risk of buying an engine that quits at 30,000 feet.
But knowing their checklist lets you show up prepared. Instead of reacting to a last‑minute diligence grenade, you lead the conversation: “Yes, we had a spike in bad‑debt expense last winter—here’s why it won’t recur and here’s the policy change we implemented.” That proactive stance can be the difference between closing at 11x EBITDA and settling for 9x plus an earn‑out you may never see.
Final Thought
In M&A, surprises rarely work in the seller’s favor. PE firms use Quality‑of‑Earnings analyses to convert uncertainty into price protection. Your job is to turn that same process into a mutual confirmation of value. Nail the data, own the story, and the only “excuse” left on the table will be the buyer’s rationale for paying full price—which, when done right, can sound remarkably convincing.
