Due diligence - Quality of Earnings QoE

After LOI

• Due diligence

• Quality of earnings

• Post close,  accounting to tax

CIM — Confidential Information Memorandum

• Common in M&A and due diligence.

• Prepared by the seller (often via an investment banker) to give buyers detailed financial, operational, and strategic info about the business.

• A QoE analysis may reference the CIM’s numbers but digs deeper to verify them.

Key Focus Areas in QoE

1. EBITDA Adjustments

1. Removing one-off gains/losses.

2. Normalizing owner salary to market rates.

2. Revenue Quality

1. Recurring vs. non-recurring.

2. Customer concentration risk.

3. Expense Analysis

1. Identifying discretionary or unusual costs.

4. Working Capital Trends

1. Ensuring enough liquidity post-sale.

5. Accounting Practices

1. Accrual vs. cash basis adjustments.

2. Compliance with GAAP or IFRS.

💡 Example:
A business reports $1.5M EBITDA. After QoE adjustments for a one-time lawsuit win (+$300k), a personal boat lease (-$50k), and a temporary pandemic grant (-$150k), the true sustainable EBITDA is $1.1M — which can change valuation significantly.