Quality of Earnings: The Highest-Leverage Action Before Going to Market

Why a QoE matters more than any other preparation step

A Quality of Earnings report is a transaction-grade financial analysis performed by an independent CPA firm. It normalizes your adjusted earnings, validates revenue quality, and gives a buyer something they can underwrite without starting from scratch. It is not an audit, not a valuation, and not a tax return. It is the single document that separates deal-ready sellers from everyone else.

The logic is straightforward: without a QoE, the buyer runs their own, and their CPA firm works for them, not for you. Every ambiguity gets resolved in the buyer's favor. With a sell-side QoE, the burden of proof shifts. The buyer's team reviews your documented analysis instead of building one from scratch, and their questions drop from 200-400 to 50-100.

What the report covers

A sell-side QoE examines five core areas. Healthcare businesses have specific considerations in each.

1. Revenue quality and sustainability

Your CPA traces revenue from the billing system through bank deposits to the general ledger. In healthcare, this means breaking revenue by payor class (commercial, Medicare, Medicaid, private pay), analyzing net collection rates, and flagging payor concentration above 30% of revenue. Reimbursement rates for your top CPT codes are compared against what an acquirer would receive post-close.

2. Normalized adjusted earnings

The report walks from your reported financials to a normalized number by identifying and supporting every add-back. Owner compensation is replaced with a fair market salary for a non-owner provider in the same specialty. Personal expenses run through the business are documented and added back. Non-recurring costs (a one-time EMR implementation, a legal settlement, a recruiting fee) are separated from the operating run rate.

3. Working capital quality

This sets the working capital target for the purchase agreement: how much cash, receivables, and payables need to stay in the business at close. Your CPA analyzes 24-36 months of monthly data to establish the normal level, accounting for seasonality and payor mix shifts. For healthcare businesses, AR aging matters: receivables over 90 days, payor-specific collection timelines, and the reserve methodology all get scrutinized.

4. Customer and payor concentration

Top 10 payor contracts by revenue, with retention history, contract terms, and margin analysis. In behavioral health: authorization patterns, average approved days by payor, and the renewal status of carve-out contracts. In home health: Medicare case-mix weights and PDGM classification. In physician practices: referral source concentration and provider-level production.

5. Balance sheet integrity

AR reserves, depreciation, accruals, related-party transactions, and hidden liabilities. For healthcare operators who own their real estate through a separate entity, the related-party rent is adjusted to fair market based on an independent appraisal.

Healthcare-specific adjustments

Healthcare QoE work goes deeper than a generic financial analysis. Here are the adjustments that come up in nearly every healthcare deal:

What it costs

Pricing depends on your adjusted earnings level, financial complexity, and provider tier. Healthcare deals carry a 10-20% premium over general commercial work because of payor-mix analysis, reimbursement rate testing, and regulatory complexity.

What drives cost up. Multiple entities add 25-50% to the base engagement. Multi-state operations add 10-20%. Deferred revenue or long-term contract accounting adds 10-20%. Recent acquisitions or carve-outs add 20-40%. Poor recordkeeping (no monthly closes, cash-basis books, owner-managed billing) can add 20-40% and may require cleanup work before the QoE can start.

What's usually excluded from the base fee. Bring-down updates ($5K-$15K per quarter, plan for at least one since the average time from QoE engagement to close is 9-12 months). Buyer Q&A support ($5K-$25K). Working capital peg negotiation support ($10K-$25K).

The timeline: when to start

Begin 3-4 months before you plan to go to market. The QoE itself takes 4-8 weeks of fieldwork, plus 2-3 weeks for your review and finalization. Starting earlier gives you time to remediate any findings before a buyer sees them.

What to prepare before engaging a provider

The cleaner your records, the faster and cheaper the engagement. Start these 12-18 months before you plan to sell.

• Monthly financial closes within 15 business days of month-end
• Bank reconciliations current for all accounts
• AR aging report by payor class, refreshed monthly
• Add-backs identified and documented with invoices, receipts, or board minutes
• Owner compensation clearly separated from distributions
• Related-party transactions documented with written agreements
• Personal expenses run through the business identified and tagged
• Revenue by payor class available monthly for the last 36 months
• All payor contracts assembled in one location with amendment history
• Tax returns, financial statements, and general ledger exports accessible

Choosing the right provider

Match the firm to your buyer pool. PE platforms and institutional buyers expect national-tier firms (BDO, RSM, Grant Thornton, CBIZ, Plante Moran). SBA and independent sponsor buyers accept strong regional firms. Overspending on a Big Four engagement for a $2M deal wastes money. Underspending on a boutique for a $15M platform deal loses credibility.

Healthcare-specific experience matters. Firms with healthcare transaction practices understand payor-mix analysis, reimbursement rate testing, credentialing diligence, and regulatory compliance review. For healthcare services deals, CBIZ, Citrin Cooperman, Withum, Aprio, and Forvis Mazars are frequently cited for sector depth in the lower middle market. Coker Group specializes in healthcare valuation and compensation benchmarking and is a common reference for fair market value opinions in physician and provider transactions.

Verify the partner, not just the firm. Ask the engagement partner for recent sell-side healthcare transactions. Ten or more recent sell-side engagements in your vertical is the right profile. Fewer than five is a flag.

Common findings that re-trade deals

These are the issues a sell-side QoE catches before a buyer does. Each one, found by the buyer's CPA instead of yours, costs you negotiating leverage and often money.

• Undocumented add-backs. 10-30% of claimed adjustments get struck when unsupported. An add-back without an invoice is an opinion, not a fact.
• Revenue recognition timing. Revenue booked on authorization rather than service delivery, or billed but not yet collected, can shift your adjusted earnings 10-25%.
• Working capital distortion near close. Accelerated collections, delayed vendor payments, or inventory drawdowns inflate working capital temporarily. Buyers see this and adjust the peg.
• Payor concentration understated. Affiliated entities counted separately, or termination-for-convenience clauses buried in contract amendments. Escrows or earnouts of 10-25% of price follow.
• Hidden liabilities. Unregistered sales tax exposure, worker misclassification, unaccrued PTO, or deferred maintenance on owned real estate.
• Aggressive accounting. AR under-reserved, inventory not written down, expenses capitalized, depreciation lives that do not match asset condition.

What EVI does with your QoE

Your Enterprise Value Index score starts with self-reported data across 10 dimensions. A QoE verifies three of those dimensions directly: Financial Performance, Revenue Quality, and Payor Diversification. When you connect your financials through CapXchange and share your QoE, those dimensions move from "Self-reported" to "Verified," your indicative enterprise value range tightens, and your score reflects documented numbers rather than estimates.

An owner with a verified QoE and a 680+ EVI score is not a lead. They are a transaction-ready client with a defensible number and a documented position across every dimension a buyer evaluates.

Sources and further reading

This guide is informational and does not constitute financial, legal, or tax advice. Costs, timelines, and outcomes vary by engagement. Consult a qualified CPA and legal counsel before making transaction decisions. Provider and firm names are included for informational purposes and do not imply endorsement or affiliation.