You’ve signed the Letter of Intent. The buyer has agreed to a $9M enterprise value based on your $1.8M EBITDA at a 5× multiple. You feel good. Then — 45 days into due diligence — the buyer comes back with a revised offer of $7.5M.
What happened?
In most cases, the answer is the Quality of Earnings (QoE) report — a detailed financial analysis conducted by the buyer’s accounting firm during due diligence. If the QoE produces a lower EBITDA than the one in your CIM, the buyer will reprice. And sellers who don’t understand how QoE works are consistently blindsided by it.
This guide explains exactly what a QoE report is, how it works in home care transactions, what analysts look for, and — most importantly — how to prepare for it so the findings support rather than undermine your price.
A Quality of Earnings analysis is a forensic review of a company’s financial performance conducted by an independent accounting firm engaged by the buyer. Unlike a standard audit — which verifies that financial statements comply with GAAP — a QoE is specifically designed to answer the question: “Is the EBITDA in this CIM real, repeatable, and sustainable?”
The output is a report that includes:
QoE reports cost buyers $25,000–$75,000 for a typical home care transaction. Buyers do not pay that amount to affirm the CIM — they pay it to find every dollar of EBITDA that doesn’t hold up under scrutiny.
The relationship is straightforward: if the QoE produces a lower EBITDA than the CIM, the buyer adjusts the price downward at the same multiple.
Example:
A $300K EBITDA reduction at 5× = $1.5M purchase price reduction. This is not unusual in poorly prepared processes. It is extremely common in transactions where the seller’s CIM was prepared by a non-specialized advisor or by the seller directly.
Home care has several sector-specific areas that QoE analysts scrutinize heavily:
Your CIM EBITDA reflects “normalized” earnings — raw EBITDA plus add-backs for owner-benefit items and one-time expenses. QoE analysts challenge every add-back:
QoE analysts examine whether your revenue is truly repeatable:
Home care has complex revenue cycles. QoE analysts will review:
Labor is home care’s largest expense — typically 60–75% of revenue. QoE analysts look at:
The QoE will produce a recommended working capital target — often the most consequential number in the report. If their recommended peg is higher than what was implicitly understood at LOI, the effective purchase price decreases dollar-for-dollar.
The QoE working capital analysis includes:
The best protection against a QoE that damages your price is preparation — not manipulation, but honest, proactive review of your own financials before the buyer’s accountants arrive.
1. Commission a sell-side QoE or financial review. Many experienced M&A advisors will recommend — and some will facilitate — a preliminary financial review before launch so you see what the buyer’s accountants will see. This allows you to resolve issues before they become surprises.
2. Document every add-back. Every EBITDA add-back in your CIM should be supported by documentation: bank statements, invoices, payroll records, or written explanation. An add-back without documentation will be rejected.
3. Clean up your AR before going to market. Write off clearly uncollectible old receivables. Address high-denial payers. Close open cost reports where possible. Buyers pay for clean AR — not for the chance that you might collect it someday.
4. Normalize the business before going to market. If you have been running excessive personal expenses through the business, cleaning them up a year before going to market will produce a cleaner income statement that’s less likely to generate add-back disputes.
5. Understand your revenue concentration risks and address them. Diversify referral sources before going to market. A business with evident concentration will face QoE discounts — and post-close earnout conditions designed to protect the buyer from that concentration risk.
Yes — increasingly, sophisticated home care sellers commission a sell-side Quality of Earnings analysis conducted by their own accounting firm before launching a process.
Benefits:
Cost: $15,000–$40,000, depending on the scope and complexity of the business.
Return: For a transaction in the $8–15M range, a sell-side QoE that prevents even a $300K EBITDA haircut at 5× multiple saves $1.5M in purchase price. The ROI is compelling.
Sellers who understand QoE see it as a tool, not an adversarial process. Buyers need to trust that the EBITDA they’re paying for is real. A QoE that confirms (or comes close to confirming) your CIM EBITDA builds that trust, accelerates closing, and reduces the chances of price re-trades in late due diligence.
The sellers who get hurt are those who don’t understand QoE, or who presented inflated EBITDA in their CIM without supporting documentation.
Work with an advisor who helps you build a defensible EBITDA narrative — and then defend it.
Talk to Hendon Partners about preparing your financials for a competitive sale →
Hendon Partners advises home care agency owners exclusively. We do not represent buyers.
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