This post uses hypothetical scenarios for illustrative purposes only. It does not describe any actual client, transaction, or representation, and is not legal advice.
Here is the quality-of-earnings story Florida founders almost never hear before the buyer’s accounting firm shows up. A typical Florida lower-middle-market founder signs an LOI at, say, an eight-times-EBITDA multiple on twelve million dollars of trailing-twelve-month adjusted EBITDA — a ninety-six-million-dollar enterprise value. He believes the multiple is set. He believes the EBITDA is set. He believes the deal is, give or take a working-capital adjustment, ninety-six million dollars. Three weeks into exclusivity the buyer’s sponsor — sponsor-backed PE based in Atlanta or Tampa, or a family office out of Naples or Palm Beach — engages a national accounting firm to run a quality-of-earnings analysis. The firm spends thirty days in the company’s general ledger. The QofE report runs eighty pages. The adjusted EBITDA in the report is not twelve million. It is ten-point-three. The buyer’s deal team sends a polite email proposing a revised enterprise value of eighty-two-point-four million, citing the QofE.
The thirteen-point-six-million-dollar gap is not a discovery. It is a reprice. The founder, who has been told by his investment banker that the QofE is “just diligence,” learns that the QofE is the buyer’s first — and most powerful — reprice lever. Nothing in the LOI prevents it. The exclusivity period gives the buyer thirty days of leverage to negotiate without competition. The QofE’s adjustments, presented in a thick bound report with the accounting firm’s logo on the cover, carry the appearance of objective truth even when the underlying judgments are deeply contested. By the time the founder’s side has caught up, the negotiation has shifted from price to which adjustments the seller will concede. The founder has lost the framing battle.
The QofE is not an audit — that is the entire point
An audit is governed by AICPA auditing standards and tests whether the financial statements are presented fairly, in all material respects, in conformity with GAAP. An audit opinion is binary — clean, qualified, adverse, or disclaimed. A QofE is something entirely different. It is an agreed-upon-procedure engagement, scoped by the buyer, designed to test the sustainability and recurring quality of the target’s reported earnings. The deliverable is not an opinion. It is a normalization analysis: a set of proposed adjustments that move from reported EBITDA to “adjusted” or “run-rate” EBITDA. The professional framing of the QofE is described by the AICPA at , but the practical reality is that the QofE is a buyer-controlled analytical exercise whose purpose is to surface arguments for repricing the deal.
This distinction matters because the QofE has no defined methodology. There is no “generally accepted” QofE standard the way there is generally accepted accounting or auditing. The accounting firm performing the QofE picks the methodology. The buyer scopes what the firm tests. The firm’s loyalty runs to the buyer who hired and paid it. The seller has no comparable countervailing analytical product unless the seller pre-commissioned its own sell-side QofE before going to market. Most Florida lower-middle-market sellers do not.
How Florida lower-middle-market QofE work plays out
In Florida’s lower-middle-market — deals in the ten-to-one-hundred-million enterprise-value band, with sponsor-backed PE buyers, family-office buyers, and increasingly independent sponsors — the QofE has become standard practice rather than an exotic ask. The major regional and national accounting firms with Florida QofE practices include Big Four firms in Miami and Tampa, the next-tier national firms, and a layer of boutique QofE specialists out of South Florida and the Carolinas. The firms run a consistent playbook. The QofE provider receives a data-room dump of trial balances, general ledgers, customer-level revenue data, employee rosters, and customer contracts. The provider builds a bottom-up revenue model, a normalized cost structure, and a series of adjustment categories. Each category becomes a reprice lever.
The five adjustment categories that move price
First, owner-related add-backs. The seller’s adjusted EBITDA presentation always includes owner-related normalizations — owner salary above market, owner perks, owner’s family on payroll, owner’s personal expenses run through the business. The QofE provider tests each one. The provider will challenge add-backs that lack documentation, that exceed market-rate replacement compensation for a successor CEO, or that constitute genuinely recurring operating expense the new owner will inherit. The founder who added back his entire $400,000 salary because he was overpaid often finds the QofE giving him credit for only the spread between his comp and a $250,000 market replacement — a $150,000 EBITDA reduction that, at eight times, is a $1.2 million price drop.
Second, one-time-versus-recurring classifications. Every business has unusual items in the trailing twelve months — legal fees from a lawsuit, a hurricane-related repair (in Florida, this is a recurring sub-question, not a one-time question), a major customer-acquisition campaign, a software conversion. The seller classifies these as non-recurring add-backs. The QofE provider asks whether each item is genuinely non-recurring or simply one instance of a recurring category. Hurricane repair in Florida is the classic edge case: the buyer’s position is that hurricanes occur on a multi-year cycle and should be normalized as a smoothed recurring expense; the seller’s position is that the specific event was a once-in-five-years storm. The QofE’s answer drives the EBITDA adjustment.
Third, revenue quality and customer concentration. The QofE provider builds a customer-by-customer revenue waterfall. The provider tests for one-time revenue (project work, non-recurring contracts), for revenue recognized prematurely (cash-basis adjustments to accrual), and for concentration risk. The 30/50/80 customer concentration test — top-one customer above 30%, top-three above 50%, top-five above 80% — flags reprice candidates. Florida service businesses with one or two anchor customers are especially exposed. The QofE provider will recommend a discount to the EBITDA multiple, not to EBITDA itself, but the practical effect is the same.
Fourth, working capital normalization. The QofE provider calculates the historical average net working capital over twelve to twenty-four months and proposes that level as the “target” for the closing working-capital true-up. The mechanics of the working-capital adjustment are the subject of an extended fight in nearly every deal — described in more depth in the cash-free-debt-free analysis on the site — but the QofE’s calculation is the buyer’s anchor. A founder whose working capital naturally seasons up at year-end faces an unfair target if the QofE picks December as a reference month.
Fifth, run-rate adjustments. The QofE provider increasingly builds a forward-looking “run-rate EBITDA” that takes the most recent quarter, annualizes it, and proposes that figure as the basis for negotiation rather than trailing-twelve-month historical EBITDA. In a Florida business with seasonal patterns — landscape, hospitality, marine — the run-rate adjustment can move EBITDA materially in either direction depending on which quarter is picked. The buyer picks the quarter. The seller objects. The negotiation ensues.
How the Florida seller should prepare
The single highest-leverage pre-LOI step a Florida founder can take is to commission a sell-side QofE before going to market. A sell-side QofE is a normalization analysis built by an accounting firm working for the seller, with the same methodology the buyer’s QofE will use, run against the seller’s data with full access. The sell-side QofE costs sixty to one-hundred-twenty thousand dollars depending on complexity. The return on that spend is typically three to ten times in preserved enterprise value, because the sell-side QofE does three things at once. First, it surfaces the adjustments the buyer’s QofE will find — before the seller is locked into exclusivity — and lets the founder fix the issues, defend the adjustments with documentation, or price them into the going-in ask. Second, it gives the seller’s investment banker a defensible EBITDA number to anchor the marketing materials. Third, it gives the seller’s counsel a basis for negotiating tight QofE scope provisions in the LOI — for example, that the buyer’s QofE will not propose run-rate or customer-concentration adjustments outside of a defined list.
The deeper preparation step is to clean the chart of accounts twelve to twenty-four months before going to market. The QofE’s job is materially easier — and the founder’s defensibility materially stronger — when the general ledger separates owner expenses from operating expenses, when one-time items are tagged at the time they hit the books rather than reconstructed in retrospect, when customer-level revenue rolls cleanly, and when working capital is managed against a defined target rather than allowed to drift. The same principles I describe in how founders and deal teams should read financial statements apply here in operational form: the seller who can read his own ledger the way a QofE provider will read it loses fewer reprice battles. The broader frame on the M&A side of the practice is on the M&A page.
The negotiation posture during exclusivity
Once the buyer’s QofE is in motion, the seller has limited leverage but is not powerless. The seller should insist on contemporaneous review of QofE workpapers, not just the final report. The seller’s investment banker and counsel should respond to every proposed adjustment in writing, with documentation, before the QofE is finalized. The seller should require that any reprice proposed on the basis of the QofE be substantiated by reference to specific adjustments rather than a global EBITDA restatement. And the seller should hold to the LOI’s reprice language — if the LOI permits adjustment only for items “materially adverse” or “not previously disclosed,” the seller can refuse adjustments that fail those tests. Most LOIs are loosely drafted on this point; pre-LOI legal review tightens them.
The headline is simple. The QofE is the buyer’s reprice lever. The seller’s only effective countermeasure is to do the analytical work first, on the sell-side, before the LOI is signed. Founders who run a sell-side QofE close at substantially the price they negotiated. Founders who let the buyer’s QofE land cold give back five to fifteen percent of the headline number, on average, in the thirty days between the QofE’s delivery and the definitive agreement.
If you are preparing for a Florida sale and want to pressure-test the QofE before the buyer’s firm arrives, feel free to reach out to my firm manager, Magda, at Magda@montague.law, or fill out our contact form. Mention you read this post.
鈥� John
