The report arrived on a Tuesday morning, 47 pages, PDF attachment, no warning. The seller had been through the LOI, signed off on exclusivity, spent 60 days building out the data room, answered two rounds of preliminary questions from the buyer's team — and now the quality of earnings report was sitting in his inbox like a verdict. He had never seen one before. He did not know what he was looking at.
That experience is more common than it should be. Most HVAC owners reach the QoE stage having heard the term but never having opened one of these documents. The report is not an audit. It is not a tax return. It is not your accountant's year-end summary. It is a structured restatement of your earnings, produced by a third-party accounting firm the buyer hired, built to answer exactly one question: is the EBITDA we underwrote in the LOI real?
The sellers who understand how to read a QoE report before it arrives are not at a disadvantage. They are the ones whose adjusted EBITDA matches the LOI number within 3%. The ones who don't understand it spend the next two weeks negotiating a reprice from a weakened position. This post explains every section so you are not in that second group.
What a QoE Report Actually Is
A quality of earnings report is commissioned by the PE buyer and paid for by the buyer. In most lower-middle-market HVAC transactions, the seller does not see the bill — it runs $25,000 to $50,000 and is absorbed by the buyer as a diligence cost. For larger deals, some sellers commission their own sell-side QoE before going to market, which gives them a preview of the findings and removes negotiating leverage from the buyer's diligence team.
The accounting firm producing the report is not your CPA. It is a transaction services team — typically at a mid-market accounting firm with dedicated M&A practice — whose job is not to file anything or certify anything but to reconstruct your earnings in a way a buyer can rely on. The scope covers two to three years of historical financials: every revenue line, every expense line, every owner draw, every related-party transaction.
The output is a single number: Adjusted EBITDA. Your reported EBITDA — what shows up on your P&L after you run it through your bookkeeping software — gets restated. Non-recurring items are removed. Owner perks are identified and partially added back. One-time events get footnoted and normalized. The result is the number the buyer believes represents the true run-rate earnings power of your business — stripped of everything that won't recur under new ownership.
The Two Different Jobs
Your CPA filed your taxes to minimize your tax liability. The QoE team is rebuilding your financials to maximize accuracy. Those are different jobs.
The Four Sections Every HVAC QoE Has
Every quality of earnings report follows a consistent structure regardless of which accounting firm produces it. Understanding what each section is trying to do tells you where the findings will come from — and where your preparation should focus.
Revenue Quality Analysis
The QoE team segments your revenue into recurring vs. project, service vs. install, and contractual vs. transactional. They pull your top-10 customer list and calculate what percentage of total revenue each represents — customer concentration above 15% for any single account is flagged. Contract terms are reviewed: are maintenance agreements auto-renewing, or does retention require active resale? Churn analysis covers the trailing 24 months of active accounts. The goal is to determine how much of your revenue a new owner can depend on without doing anything differently.
Adjusted EBITDA Bridge
This is the heart of the report. The bridge starts with your reported EBITDA from the trailing twelve months, then adds or subtracts each adjustment to arrive at QoE-Adjusted EBITDA. Every add-back has a line item with a dollar amount and a written rationale. Add-backs the QoE team accepts are labeled as supported. Add-backs they question or reject are labeled as challenged. The final number — QoE-Adjusted EBITDA — is the figure the buyer uses to calculate the revised purchase price. Every dollar of variance between your LOI-assumed EBITDA and the QoE-adjusted figure translates directly into deal reprice risk.
Working Capital Analysis
Working capital is current assets minus current liabilities, and the QoE report establishes a normalized working capital peg — the baseline level of working capital that should be delivered at close as part of the agreed-upon purchase price. The peg calculation includes AR aging (anything 90+ days is excluded or discounted), inventory valuation, accrued liabilities, and seasonality adjustments. This number will be negotiated into the purchase agreement and becomes the reference point for a post-close working capital adjustment, which can add or subtract hundreds of thousands of dollars from your payout.
One-Time and Non-Recurring Item Review
The QoE team reviews every item the seller has identified as non-recurring and makes an independent determination about whether it qualifies. Common categories: large equipment purchases, litigation settlements, PPP loans and COVID-era relief funds, one-time commercial installs, and owner compensation normalization. Items the team accepts as non-recurring get added back to EBITDA. Items they question get challenged — meaning they will not be included in the adjusted figure unless the seller provides compelling documentation. The distinction between “supported” and “challenged” add-backs is where most reprice conversations originate.
The Add-Backs That Get Challenged
This is the section of the QoE process that surprises sellers most. The add-backs you expected to sail through become the ones with the most footnotes. The five categories below account for the majority of challenged adjustments in HVAC transactions.
Owner Compensation Normalization
This is the most common and most contested category. You drew $420,000 from the business last year. You believe the full $420,000 should be added back as an owner perk. The QoE team disagrees — partially. Their analysis: the buyer will need to hire a replacement CEO or general manager to run operations after close. Market rate for that role in your market is $180,000. They add back the $240,000 difference. Not $420,000. The gap — $180,000 — stays in the expense structure. If your draw was $420,000, you lose $180,000 of add-back you were counting on.
Related-Party Transactions
The QoE team reviews every transaction between the business and entities related to the owner. Vehicles leased from a family member. Rent paid to an LLC that the owner controls. Family members on the payroll — spouses, children, parents — at rates above market or for roles that would not exist under new ownership. Each of these gets scrutinized against a market-rate benchmark. The ones that exceed market rate get partially added back. The ones that represent genuine business expenses stay in. You need documentation and market-rate comparisons for every one of these before the QoE team arrives.
One-Time Revenue
A large commercial installation that won't recur. A government contract you bid on opportunistically. COVID-era PPP loans that showed up as revenue. These items inflate reported EBITDA but the QoE team will remove them from normalized earnings because they do not represent the ongoing run rate of the business. The challenge: “one-time” is a judgment call. If the large commercial install was a one-time contract, document that explicitly. If your business regularly pursues commercial work, the QoE team will argue it's recurring and leave it in — as revenue the buyer expects to see recur.
Non-Cash Items
Depreciation is already added back in the standard EBITDA calculation, but the QoE team reviews depreciation treatment carefully. Equipment write-offs, accelerated depreciation elections under Section 179, and asset sales are all examined. The question they are asking: is the reported depreciation expense a reasonable proxy for the maintenance capex required to keep the fleet and equipment operational? If you have been depreciating aggressively while deferring maintenance, they will normalize capex upward — which reduces the adjusted EBITDA margin.
Discretionary Expenses
Personal expenses run through the business. Travel that included family vacations. Country club memberships. Season tickets. Meals and entertainment above a reasonable business level. These are genuine add-backs — they would not be incurred under new ownership — but documentation is everything. An expense labeled “meals” in QuickBooks with no supporting receipts or categorization is harder to defend than one coded to a specific category with a written explanation. Prepare a schedule of every discretionary item with the dollar amount, the account it was coded to, and a one-line description of why it is non-recurring.
The Math Behind Every Challenged Add-Back
Every challenged add-back reduces your adjusted EBITDA. Every dollar of adjusted EBITDA reduction at a 6x multiple costs you $6.
How QoE Findings Reprice Deals
The clearest way to understand the financial stakes of a QoE report is through a concrete example. A business signs an LOI at $1.5M EBITDA with a 6x multiple — a $9M enterprise value. Everything looks clean going into diligence. The data room is organized. The seller has been responsive. Then the QoE report lands.
The Reprice Walkthrough
That is a $1.8M reprice on a business that looked clean at the time of LOI. None of the findings were invented by the QoE team — every one was a legitimate issue that existed in the financials before diligence started. The seller who knew about these issues before the data room opened had time to address them. The one who didn't negotiated the reprice from exclusivity, with no competitive process to fall back on.
This is the structural problem with QoE for unprepared sellers: by the time the report lands, you are in exclusivity. You have told other buyers the business is under LOI. Your leverage to walk away and restart the process is real but painful — and most sellers, 60 days into diligence and two months from their projected close date, accept the reprice rather than restart from scratch.
Know where QoE scrutiny will focus before you sign the LOI.
The free OffRamp calculator generates a PE Readiness Score that identifies the same risk factors QoE teams flag most often in HVAC transactions. Run it before the first buyer conversation.
Run the Free PE Readiness Calculator →What to Do Before the QoE Team Arrives
The most effective QoE preparation is not about hiding anything — it is about finding everything first. The QoE team will find it regardless. The question is whether you find it three months before exclusivity and have time to address it, or whether the buyer finds it in week four of diligence and uses it as a reprice lever.
Run Your Own Add-Back Analysis
List every item you plan to add back to reach your claimed adjusted EBITDA. For each one, document the support: bank statements, invoices, a written explanation of why it is non-recurring. Build this as a schedule — a spreadsheet with the category, the amount, the year, and the supporting document reference. The QoE team will build the same schedule. Yours should match theirs. If it doesn't, you want to know that before they do.
Audit Related-Party Transactions
Pull every transaction between the business and related entities for the trailing three years. Vehicle leases, rent payments, compensation to family members, management fees to holding companies. For each one, gather documentation and a market-rate comparison. The QoE team will ask for all of it. Having it ready — organized, explained, supported — removes the negotiating leverage a disorganized data room creates. Clean them up if you can; explain them clearly if you can't.
Normalize Owner Comp
Know what a market-rate replacement general manager or CEO would cost in your market before the QoE team tells you. Research published salary data for HVAC general managers in your geography and document it. If you have already hired a GM and reduced your own compensation, that story is already written. If you haven't, the QoE team will normalize it for you — and their market rate assumption is the number that reduces your add-back. Better to know that number and plan around it than to be surprised by it in the report.
Pull Your AR Aging
Run your accounts receivable aging report today and look at anything over 90 days. The QoE team will exclude or discount these receivables from the normalized working capital peg calculation. If you have long-outstanding receivables that are actually collectible, start collecting them now — before they show up in the report as uncollectible. If they are not collectible, write them off before diligence starts. A clean AR aging report coming into QoE is worth more than a disputed conversation about receivable quality during exclusivity.
Document One-Time Items
For every item you are classifying as one-time or non-recurring, write a brief explanation: what it was, when it occurred, why it will not repeat. Dates and dollar amounts. The QoE team's job is to challenge the non-recurring classification if they lack documentation. Your job is to make the classification so well-supported that there is nothing to challenge. A one-page memo explaining that the $180,000 roof repair in 2023 was triggered by a specific weather event and is covered by insurance — with the insurance settlement attached — is a different conversation than a line item labeled “other expenses” with no backup.
Run the OffRamp Calculator
The OffRamp PE Readiness Score evaluates your business across six dimensions PE buyers and QoE teams scrutinize most heavily: recurring revenue quality, financial documentation, owner independence, customer concentration, working capital health, and growth trajectory. Your score predicts where QoE scrutiny will focus — so you know which of the six areas to prioritize in preparation. The calculator takes three minutes and is free.
The Real QoE Goal
The best QoE outcome isn't a perfect report. It's a report with no surprises — because you found everything first.
The Seller Who Gets a Clean QoE
The seller who gets a clean quality of earnings report did not get lucky. They spent 90 days before exclusivity doing exactly what the QoE team does — walking through every add-back, reviewing every related-party transaction, normalizing owner comp against market data, cleaning up the AR aging, and building a written explanation for every item they planned to classify as non-recurring.
When the 47-page report arrived, it landed on a business that had already been through its own version of the same analysis. The QoE-Adjusted EBITDA matched the LOI number within 3%. The working capital peg was consistent with what the seller had calculated. The two challenged add-backs — a vehicle lease and one discretionary travel item — had been documented in advance and were resolved in a single email exchange rather than a three-day negotiation.
The deal closed at the original price. That outcome had nothing to do with the business being exceptional and everything to do with the seller understanding what the QoE team was going to look for before the QoE team arrived.
The report is 47 pages because the process is thorough. That thoroughness works in your favor when you are prepared — because a thorough review of clean, documented financials produces a clean adjusted EBITDA. The only way a QoE report reprices your deal is if it finds something you did not already know about. That is entirely within your control.
Frequently Asked Questions
What does a QoE report cost in an HVAC deal?
A buy-side QoE report typically costs $25,000–$50,000 for a lower-middle-market HVAC deal ($1M–$3M EBITDA). The buyer pays for it in most transactions. For larger deals ($5M+ EBITDA), costs can run $75,000–$150,000 because the scope is broader — more revenue lines, more entities, more years of data. Seller-side QoE reports, which some sellers commission before going to market, tend to run slightly less because the scope is directed by the seller rather than the buyer's diligence agenda.
Who hires the QoE firm?
In most HVAC PE transactions, the buyer commissions and pays for the QoE. The buyer selects the accounting firm — typically one with M&A transaction services experience, not your CPA's firm. The seller does not control the QoE process, which is exactly why preparation matters. Some larger deals include a seller-side QoE report commissioned before the LOI, which gives the seller a preview of what the buyer's team will find and an opportunity to address issues proactively.
How long does a QoE report take?
A standard HVAC QoE report takes four to eight weeks from data room access to final report. The timeline depends on the quality of your financial records, how quickly you respond to information requests, and the scope of the engagement. Deals with clean books and a well-organized data room consistently run toward the shorter end. Deals where the QoE team has to chase down source documents, reconcile QuickBooks to tax returns, or ask multiple rounds of follow-up questions run long — and that delay is always borne by the seller in the form of an extended exclusivity period.
Can I do a seller-side QoE report before going to market?
Yes, and for larger HVAC deals ($5M+ revenue) it is increasingly common. A seller-side QoE, sometimes called a vendor due diligence report or sell-side QoE, is commissioned by the seller before the LOI. It gives you a neutral third-party restatement of your EBITDA that you can share with buyers as part of the CIM. The strategic benefit: buyers who trust the seller-side QoE can move faster with less retrade risk, which often translates to a higher purchase price and shorter exclusivity. The cost — typically $30,000–$60,000 — is almost always recovered in a cleaner close.
What's the difference between a QoE report and an audit?
An audit is a formal attestation by a CPA that your financial statements comply with GAAP. It is backward-looking, regulatory in nature, and designed for reporting compliance. A QoE report is an analytical document produced for a specific transaction. It does not attest that your financials are GAAP-compliant — it restates them to answer a different question: what is the true run-rate earnings power of this business after normalizing for non-recurring items, owner perks, and one-time events? QoE accountants use agreed-upon procedures, not audit standards. The output is an adjusted EBITDA range the buyer can use to price the deal, not a certified financial statement.
OffRamp is a free valuation tool for HVAC business owners. We don't sell your information, represent buyers, or work on commission. The calculator and reports are educational tools — always consult a licensed M&A advisor before entering a sale process.