Quality of Earnings in Mid-Market M&A: When It Matters and How It Shapes Valuation

In practice, this is often where transactions start to shift. Sellers enter a process with a view of EBITDA (a commonly used measure of operating profit) based on internal reporting. Buyers approach the same number with a different lens—focused on sustainability, risk, and what they are prepared to underwrite. The difference between those views is where value can come under pressure. If a seller does not clearly define and support their earnings, the market will tend to do it for them. And in many cases, that shift happens quickly once diligence begins.

What a Quality of Earnings Actually Does in a Transaction

A QoE analysis is sometimes framed as a technical accounting exercise. In reality, it is a commercial assessment of how reliable earnings are in a transaction context and where reported performance is translated into something a buyer, lender, or investment committee is willing to rely on.

For this reason, QoE analyses are now commonly performed by both sell-side and buy-side players. On the sell-side, this is often referred to as vendor due diligence (VDD)—where the seller commissions an independent QoE report in advance of a transaction. On the buy-side, the acquirer conducts its own review to validate the financial profile of the business. Lenders also frequently require a QoE report before providing acquisition financing.

When Quality of Earnings Enters the Process—and Why Timing Matters

Sell-Side M&A Processes

Many owners still enter the market without having completed a formal QoE. The expectation is that any issues can be addressed during diligence. In practice, this is often when points of contention emerge—typically once one or more preferred buyers have been selected and the process has advanced.

Buy-Side M&A Processes

Here, the sequencing is more deliberate. A QoE is typically commissioned after indicative offers are submitted and accepted by the seller. At that point, buyers are confirming whether the assumptions underpinning their valuation are supported. Where they are not, adjustments are often made before moving to a binding offer.

Where Value Is Won or Lost: The Reality Behind the Numbers

A QoE ultimately supports a normalised EBITDA view, but the process of arriving at that number is where most of the substantive discussion—and negotiation—takes place.

Revenue: Performance vs. Sustainability

Revenue is often the starting point. In many Industrial businesses, a strong year may be driven by a small number of large contracts. In Technology companies, growth may be supported by new customer wins, but with varying levels of recurring revenue or retention.

EBITDA Adjustments: Where Negotiation Typically Focuses

Most businesses come to market with a set of add-backs and adjustments intended to reflect underlying profitability. These often include owner compensation, one-off costs, or anticipated efficiencies. While many of these adjustments are reasonable in principle, they are rarely accepted at face value.

In practice, it is common to see adjustments accepted in part rather than in full. Differences in interpretation around what constitutes “non-recurring” are frequent, particularly where costs appear intermittently but consistently over time. Forward-looking savings or profitability improvements are often discounted unless already realized.

In owner-managed businesses, adjustments relating to compensation or discretionary spend are often an early focus. Buyers may accept the concept but apply more conservative assumptions. As a result, EBITDA adjustments tend to become a negotiation rather than a fixed calculation, and the final normalised EBITDA reflects a balanced position between the parties.

Working Capital: A Frequent Source of Late Adjustment

Working capital—the cash tied up in day-to-day operations such as inventory, receivables, and payables—can have a direct impact on value, particularly through mechanisms used to adjust price at closing.

How Quality of Earnings Findings Affect Valuation

The impact of a QoE analysis is typically most visible in how it affects EBITDA—and, by extension, valuation.

For example:

Reported EBITDA: EUR 4.5 million

QoE adjustment: EUR (0.6 million)

Normalised EBITDA: EUR 3.9 million

At a 7x multiple, this results in a EUR 4.2 million difference in enterprise value. In many mid-market transactions, multiples tend to move within relatively narrow ranges. Changes in EBITDA, however, can have a more pronounced effect on value.

In our experience across mid-market transactions, this is one of the stages where initial valuation expectations are most frequently refined. Sellers who have not previously tested their numbers may find themselves responding to challenges rather than setting the narrative. Buyers, in turn, use the QoE to confirm or adjust their valuation assumptions and to inform deal structure.

Conclusion

In mid-market M&A, valuation is often expressed as a multiple of earnings. In practice, the more important question is how those earnings are defined and supported.

A QoE report is where that definition is tested. It is where assumptions are reviewed, adjustments are discussed, and a clearer view of sustainable performance is established.

For sellers, engaging with this process early can help maintain control over how the business is presented and understood. For buyers, it provides a structured basis to assess risk and validate investment assumptions. In both cases, it is a central component of due diligence—and a key driver of how value is ultimately agreed.