When PE sends the term sheet, the headline multiple feels like the number. It's not. The number PE actually pays is determined by what their accountants find when they run the Quality of Earnings report — a forensic review of everything you've reported as EBITDA for the last two to three years.
A strong QoE confirms your EBITDA and protects the headline offer. A weak one gives the buyer grounds to reprice — sometimes by 0.5x–1.5x EBITDA before you get to closing. Before PE sends their accountants, read the 50 questions PE buyers ask during diligence so you know exactly what's coming.
See also: What Is Seller's Discretionary Earnings (SDE)? — understanding the difference between SDE and EBITDA before you enter a QoE review can save you from surprises at the table.
What Is a QoE Report?
The QoE in plain English
Not an audit — it's a forensic analysis of your EBITDA by the buyer's accountants. An audit verifies that your books follow accounting rules. A QoE verifies that your earnings are real, recurring, and sustainable.
Goal: confirm (or adjust) normalized earnings before they set the final price. Every adjustment PE's accountants make is a potential dollar-for-dollar change to your deal value.
Scope: last 2–3 fiscal years of revenue, COGS, SG&A, add-backs, and adjustments. The accountants build a “bridge” from your reported financials to a normalized EBITDA figure — and that normalized figure is what PE prices the deal on.
The 5 Things QoE Accountants Look For
PE's QoE team isn't auditing your compliance — they're building a case for repricing. Here's what they focus on.
- 1
Revenue quality
Accountants split your revenue into recurring (maintenance agreements, service contracts) vs. one-time (equipment replacements, new installs). Recurring revenue is worth more — it's predictable and defensible. Concentration risk is also flagged here: if your top 3 customers represent more than 20% of revenue, expect that to come up in the QoE findings.
- 2
EBITDA add-backs
The QoE team reviews every add-back you've claimed: owner salary normalization, one-time expenses, personal expenses run through the business. Each one needs documentation. Undocumented add-backs get removed — reducing normalized EBITDA and, by extension, your deal value.
- 3
Working capital normalization
HVAC businesses have seasonal cash flow patterns. The QoE reviews A/R aging (slow-paying commercial clients are a flag), deferred revenue (collected but not yet earned), and how much working capital the business actually needs to operate through a full seasonal cycle. This directly sets the working capital peg at close.
- 4
Customer concentration
PE prefers no single customer above 15–20% of revenue. If one commercial client represents 30% of your EBITDA, that's a concentration discount — both in the QoE findings and in the multiple they're willing to pay. The QoE quantifies exactly how much revenue disappears if that client leaves.
- 5
Off-balance-sheet items
Equipment leases, deferred maintenance on fleet and HVAC equipment, unfunded liabilities, personal guarantees — any obligation that doesn't show up in your P&L gets surfaced here. These items can reduce your net proceeds at close if they represent a liability the buyer is inheriting.
EBITDA Add-Backs: The Number PE Actually Pays On
Your normalized EBITDA — not your tax-return EBITDA — is what PE prices the deal on. These are the most common add-backs in HVAC transactions. Document every one with receipts before the QoE starts.
| Common Add-Back | What It Means |
|---|---|
| Owner's above-market salary | PE normalizes to market rate for a GM (~$120–150k) |
| One-time equipment repair | Non-recurring; excluded from run-rate EBITDA |
| Personal vehicle (owner's) | Run through business — added back |
| Owner family compensation | Relatives on payroll at above-market rates |
| One-time professional fees | M&A legal / accounting fees for this transaction |
| Rent paid to owner entity | Compared to market rate; excess added back or adjusted |
What Makes QoE Results Come Back Low
Three issues consistently produce unfavorable QoE findings — and give buyers leverage to reprice before close.
QoE Red Flags
Revenue tied to one or two large commercial clients
Concentration discount. If those clients represent >20% of revenue, PE will model a “what if they leave” scenario — and price accordingly. This is the most common source of post-QoE repricing in HVAC deals.
Messy books: owner mix of personal and business expenses
When the QoE team has to spend extra time separating personal and business expenses, it signals operational risk — and gives them grounds to question add-backs they can't verify. It also extends the QoE timeline, which costs you negotiating momentum.
Inconsistent revenue recognition
Invoices not matched to job completion, revenue booked when collected rather than when earned, or deferred revenue that isn't tracked create ambiguity in the QoE. Ambiguity always resolves in the buyer's favor.
What You Can Do Before the QoE Starts
The QoE doesn't have to be adversarial. These five steps put you in a stronger position before the buyer's accountants arrive — and before you get to LOI negotiation.
- 1
Separate personal and business expenses — NOW
Even mid-year. The sooner your books reflect a clean separation, the cleaner the QoE will be. If you wait until diligence starts, you're handing the QoE team a reason to question every line item.
- 2
Build a clean add-back schedule with your CPA
Document every add-back with receipts, invoices, and a brief explanation. A well-prepared add-back schedule shortens the QoE timeline and prevents the buyer's team from disallowing legitimate adjustments due to missing documentation.
- 3
Diversify your customer base if top 3 clients are >20% of revenue
This takes time — which is why 12–18 months of pre-sale preparation matters. Every percentage point you reduce concentration risk is leverage you keep in the QoE.
- 4
Run a trailing-12-months P&L that matches actual cash flows
Your monthly P&Ls should tie to your bank statements and tax returns without unexplained variances. If a PE accountant finds a $40,000 gap between reported revenue and deposits, they'll flag it — and the burden of explanation falls on you.
- 5
Engage your own CPA to do a “shadow QoE”
Before the buyer's team arrives. A sell-side QoE surfaces the issues that would come up in the buyer's QoE — while you still have time to address them. It costs $15,000–40,000 but often pays for itself in reduced buyer renegotiation leverage.
What the QoE Actually Determines
The QoE determines the final multiple, not the headline offer. A strong QoE defends your valuation. A weak one gives the buyer leverage to reprice — often by 0.5x–1.5x EBITDA. Buyers who find QoE issues also have grounds to reduce earn-out targets and tighten working capital pegs — compounding the impact on your net proceeds.
Use OffRamp's free calculator to understand your EBITDA baseline before due diligence begins.
Run the CalculatorFrequently Asked Questions
Who pays for the Quality of Earnings report?
Typically the buyer's PE firm pays for the QoE — it's part of their due diligence cost. Some sellers commission their own "sell-side QoE" pre-listing, which can cost $15,000–40,000 but often pays for itself by reducing buyer renegotiation leverage.
How long does a QoE report take?
Usually 4–8 weeks for an HVAC company in the $2M–$10M EBITDA range. The timeline depends on how organized your books are — clean financials cut it to 3–4 weeks.
Can a QoE report increase my sale price?
Not directly — but a strong QoE prevents price reductions. Buyers use QoE findings to justify repricing or reduced earnouts. A seller with a clean QoE maintains their leverage through close.
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.