What is a quality of earnings analysis?
A quality-of-earnings (QoE) analysis is a financial deep-dive that tests whether a business's reported earnings are real, sustainable, and worth paying for. In a practice sale, the buyer's QoE team rebuilds your P&L on a normalized basis to find adjusted EBITDA, tests every add-back against support, sets the working-capital peg, and examines revenue quality and payer concentration. It is not an audit of compliance; it is a stress-test of the earnings the price is based on. Sellers increasingly commission their own QoE first, so they walk into diligence knowing what the buyer will find. The way to be ready is to keep your numbers sale-ready years before an offer, not weeks.
- What it builds
- Adj. EBITDA
- Sets the
- WC peg
- Closed as sell-side CFO
- 5
- Buyer fees to me
- $0
01 · The definition
What a QoE is, and what it is not
A quality-of-earnings analysis is how a buyer decides whether your earnings are worth paying for. It rebuilds your P&L on a normalized basis, tests every adjustment against support, and stress-tests the durability of the revenue and margin. The output is a view of adjusted EBITDA the buyer trusts, plus a list of everything that might not hold.
It is easy to confuse with an audit, and it is not one. An audit gives an opinion that your financials comply with accounting standards. It looks backward and asks whether the numbers are correct. A QoE asks a forward question: are these earnings real, run-rate, and sustainable enough to underwrite a purchase price. You can have clean books, a clean audit, and still have a QoE move the price.
In almost every practice sale of any size, a QoE happens. The only real choice is whether you see it coming or find out what it says in the buyer's repricing letter.
Why the bar is higher now
Independent ownership has shrunk for over a decade. The AMA's benchmark survey found 42.2% of physicians in private practice in 2024, down from 60.1% in 2012, and the share in a PE-owned practice reached 6.5%. That consolidation drew a joint FTC, DOJ, and HHS inquiry in March 2024. Well-capitalized buyers run professional QoE reviews, so the readiness bar is higher than it used to be.
02 · The diligence
What a buyer's QoE team tests
A QoE is an operator's audit of whether your earnings survive the sale. Five things it always tests, from the number the price rests on to the risks that discount it:
- 01
Normalized, adjusted EBITDA
Your P&L rebuilt on a run-rate basis: owner compensation reset to market, one-time and non-recurring items stripped out, and personal expenses removed, to show what the practice actually earns for a new owner. Adjusted EBITDA is the number most practices sell on a multiple of, so how it is built matters more than any other line.
- 02
Add-backs and their support
Every adjustment that raises EBITDA gets tested against documentation. Add-backs you can prove hold. The ones you cannot get discounted, and a stack of unsupported add-backs makes the QoE team distrust the rest of the model. The documentation is the value, not the adjustment itself.
- 03
The working-capital peg
The normal level of working capital the practice needs to run, which sets the amount you must deliver at close. This is where sellers quietly give money back. If the peg is set from the buyer's read instead of your own analysis, the give-back comes out of your proceeds after the price is agreed.
- 04
Revenue quality
Where revenue comes from, how durable it is, and whether recognition is clean. Recurring, well-documented revenue is worth more than revenue that spikes, depends on a few referral sources, or rests on timing. QoE tests whether the top line will still be there under a new owner.
- 05
Customer and payer concentration
How much of the practice leans on a single payer, referral source, or a handful of providers. Concentration is fragility, and buyers price it down. QoE quantifies it so the buyer can decide how much of your earnings to treat as at risk.
03 · Sell-side QoE
Why sellers run the review on themselves first
The buyer's QoE works for the buyer. Its job is to find every reason the earnings might be lower than you claim, and every dollar it can defensibly take out of the price. Handing that team a set of books you have never stress-tested yourself is negotiating blind.
A sell-side QoE runs the same tests first, on your timeline. You find the weak add-backs while you can still document them, discover the working-capital surprises before the peg is proposed, and quantify your own concentration before the buyer does. Nothing gets fixed in the letter of intent; it gets fixed in the quarters before it.
The result is that you walk into diligence already knowing what it will say. The buyer's review then confirms your numbers instead of rebuilding them, and the conversation is about your analysis rather than their reconstruction.
The seat this sits in
The banker markets the practice, the attorney papers the deal, and the CFO seat owns the numbers: the recast P&L, the add-back support, the working-capital analysis, and the data room. It matters that the person in that seat is paid only by you. I take no fee, commission, or referral cut from any buyer, PE firm, or broker, so the QoE work is built for your side of the table and nobody else's.
04 · Being ready
You get QoE-ready years early, not weeks
Recasting historical financials is fast. Fixing what the recast exposes is not. Clean monthly closes, documented add-backs, a defensible working-capital rhythm, and schedules that tie out take a few quarters to establish, and a buyer's QoE team can tell the difference between numbers that were built to be ready and numbers that were assembled under deadline.
This is work I have done. On five closed sales I sat as the sell-side CFO on the recast P&Ls, the add-back support, and the working-capital and roll-forward schedules that survived diligence. I do not originate buyers and I do not negotiate your deal; your banker and attorney do that. My seat is the numbers, from the first diligence request to the wire clearing, and the point of doing it early is that you negotiate from strength instead of scrambling.
05 · Questions owners ask
Quality of earnings: common questions
What is a quality-of-earnings analysis?
A quality-of-earnings, or QoE, analysis is a detailed financial review that tests whether a business's reported earnings are real, sustainable, and defensible. It rebuilds the P&L on a normalized basis to find adjusted EBITDA, tests every add-back against support, sets the working-capital peg, and examines revenue quality and concentration. It is different from an audit: an audit checks that the financials comply with accounting standards, while a QoE asks whether the earnings will actually survive a change of ownership. In a deal, the QoE is what the price gets built on.
What does a buyer's QoE team actually test?
Five things, in essence. First, normalized adjusted EBITDA, your earnings rebuilt on a run-rate basis with owner comp reset to market and one-time items removed. Second, every add-back, tested against documentation. Third, the working-capital peg, the normal level of working capital you must deliver at close. Fourth, revenue quality, meaning how durable and clean the top line is. Fifth, customer and payer concentration, because a practice that leans heavily on one payer or referral source carries more risk. Anything unsupported gets discounted or repriced.
What is adjusted EBITDA and why does it matter so much?
EBITDA is earnings before interest, taxes, depreciation, and amortization. Adjusted EBITDA takes that and normalizes it: it resets above-market owner compensation to a market rate, strips out one-time and non-recurring costs, and removes personal expenses run through the business, to show what the practice earns for a new owner. It matters because most practices sell on a multiple of adjusted EBITDA, so a single defensible dollar of adjustment can be worth several dollars of price. The whole negotiation runs through how this number is built.
Why would a seller pay for their own QoE?
Because it puts you in front of the diligence instead of behind it. A sell-side QoE runs the same tests the buyer's team will run, so you find the weak add-backs, the working-capital surprises, and the concentration risks first, while you still have time to fix or explain them. You walk into diligence knowing what the buyer will find, which means you negotiate from your own numbers rather than reacting to theirs. The alternative is learning about a problem in the buyer's repricing letter.
When should I start getting ready for a QoE?
Years before an offer, not weeks. Recasting historical financials is fast, but fixing what the recast exposes is not. Clean monthly closes, documented add-backs, a defensible working-capital rhythm, and reporting that ties out schedule by schedule take a few quarters to establish. Owners who start early hand the buyer's QoE team numbers that confirm their story. Owners who start when the letter of intent arrives hand over whatever the books happen to look like that month, and pay for the gap in the price.
How much of medical practice buying is private equity now, and why does that raise the QoE bar?
Independent ownership has been shrinking for over a decade. Per the American Medical Association's Physician Practice Benchmark Survey, 42.2% of physicians worked in private practice in 2024, down from 60.1% in 2012, and the share in a practice owned by a private-equity group reached 6.5% in 2024. That consolidation drew a joint FTC, DOJ, and HHS public inquiry into private-equity control of health care in March 2024. For a seller, the practical point is that well-capitalized buyers run rigorous, professional QoE reviews, so the bar for being ready is higher than it was a decade ago.
How is a QoE different from having a good CPA or an audit?
A CPA keeps your books accurate and files your taxes, and an audit gives an opinion that your financials comply with accounting standards. Both look backward and both answer, is this correct. A QoE answers a different question: are these earnings real, run-rate, and sustainable enough for a buyer to pay a multiple for. It normalizes, adjusts, and stress-tests rather than verifies. You can have clean books and a clean audit and still have a QoE surface add-backs and working-capital issues that move the price.
How does Koen Advisors help me get QoE-ready?
This is work I have done from the seller's side. On five closed sales I sat as the sell-side CFO on the recast P&Ls, the add-back support, and the working-capital and roll-forward schedules that survived the buyer's diligence. The Margin Map runs the same first pass a QoE team will run: rebuild the P&L by provider and location, build the 13-week cash forecast, and surface where the numbers will not hold. It is $7,500 over three weeks. When I find the gaps, they are your head start instead of the buyer's repricing argument, and I take no fee from any buyer, so the math is built for your side only.
Keep reading
Preparing a medical practice for sale
Getting a practice sale-ready for a PE buyer: clean provider P&L, defensible add-backs, and starting early.
The other side of PEAccess to capital and private equity
How growth gets funded, what capital really costs, and what changes when private equity comes calling.
The pillar guideFractional CFO for medical practices
What one is, what they do for a practice, cost, and how it differs from a bookkeeper or CPA.
Start here
Run the QoE first pass before the buyer does.
The Margin Map runs the same first pass a buyer's quality-of-earnings team will run: rebuild the margins, test the schedules, find the gaps. When I find them, they are your head start instead of their repricing argument. Three weeks, $7,500 flat.