Quality of Earnings: The Report That Decides Your Multiple

Most owners can tell you last year’s revenue to the dollar. Almost none can tell you what a buyer’s quality of earnings report will say their business actually earns. The gap between those two numbers is where deals get repriced, and as of 2026 it usually runs into the hundreds of thousands, sometimes the millions. The Exit Planning Institute estimates that up to 90 percent of an owner’s net worth is tied to a business they have never had independently valued. So the first time many owners see a real quality of earnings number, it is on a buyer’s spreadsheet, and the offer has already moved.

That is a hard way to find out. There is a better one.

What is a quality of earnings report?

A quality of earnings report is an independent financial analysis that strips a company’s earnings down to what is real, recurring, and transferable to a new owner. It is not a tax return and it is not an audit. A tax return is built to lower what you owe. An audit confirms the numbers are accurate. A quality of earnings report asks a different question: of the profit on this page, how much can a buyer actually count on after you are gone?

On the buy side, the buyer orders it during due diligence to test what they are paying for. On the sell side, a smart owner orders their own version before going to market, so nothing in it is a surprise. The work typically runs 30 to 90 days depending on how clean the books are and how much of the business lives in the owner’s head.

The output is a normalized earnings figure. Everything about your price flows from that one number.

Why your multiple lives or dies on normalized EBITDA

Your sale price is normalized EBITDA multiplied by a multiple. That is the whole equation, and it is why a quality of earnings report carries so much weight. Move the EBITDA, and you move the price by the multiple every time.

Here is what that looks like in a typical lower middle-market deal. The figures below are illustrative, but the math is exact.

Say an owner runs the books and sees about 1.5 million dollars in profit. At a 5x multiple, that owner is picturing a 7.5 million dollar sale. Then the quality of earnings work begins. The analyst finds 300,000 dollars of earnings that will not survive the handoff: a one-time insurance settlement, revenue from a customer who has since left, and a few personal expenses run through the business that a buyer will not accept as add-backs. Normalized EBITDA lands at 1.2 million dollars.

At the same 5x multiple, the price is now 6 million dollars. The business did not change. The number a buyer trusts changed, and it cost 1.5 million dollars.

This is the part owners miss. The buyer’s number is already set in their head before you ever sit down to negotiate, and it was set by the quality of earnings report, not by your opening ask. You cannot argue your way back to the higher figure once the analysis is done. You can only change what the analysis finds, and only if you start early enough to fix it.

EBITDA add-backs: what counts and what a buyer throws out

EBITDA add-backs are the expenses you ask a buyer to ignore because they will not carry over to the new owner. Done right, they raise normalized EBITDA and protect your multiple. Done wrong, they get rejected during the quality of earnings review, and every rejected add-back makes the seller look like they were reaching.

Buyers generally accept add-backs that are genuinely one-time or genuinely personal. Your above-market owner salary, when the buyer will hire a manager for less. A one-time legal settlement. The boat, the personal travel, the family member on payroll who does not work in the business. These are real, and a credible analyst will allow them.

What gets thrown out is the stuff that looks recurring no matter how you label it. Discretionary marketing you call “one-time” but spend every year. Repairs you deferred to make a year look better. Revenue from a single project that will not repeat. When an owner pads the add-back schedule, an experienced buyer notices, and the cost is not just the rejected dollars. It is trust. Once a buyer catches one aggressive add-back, they re-examine all of them, and the whole report gets harder.

The owners who hold their multiple are the ones who only claim what they can defend.

What else a quality of earnings report digs into

Normalized EBITDA is the headline, but a quality of earnings report reads the parts of the business that quietly set your risk, and risk sets the multiple just as much as profit does.

Revenue quality comes first. A buyer separates recurring revenue under contract from one-time project work, because the first is worth far more than the second. Customer concentration follows. When a single client sits above 20 percent of revenue, buyers treat it as a risk to price down, because if that customer leaves after close, the earnings they paid for walk out the door. Then comes working capital, margin trends, and the gap between profit on paper and cash in the bank. Plenty of profitable businesses cannot convert that profit into cash on a reliable schedule, and a quality of earnings report shows it.

There is one finding that catches sellers late, and it is worth knowing now: the working capital peg. A quality of earnings report sets a target level of working capital the buyer expects to be left in the business at close, based on the trailing months the analyst reviews. Deliver less than the peg and the purchase price gets reduced dollar for dollar, often at the closing table when there is no time left to argue. Owners who do not understand the peg can watch a clean deal lose 100,000 dollars or more in the final week, not because the business was worth less, but because nobody planned for it.

Underneath all of it sits owner-dependence. The more the business needs you in the room to function, the less transferable it is, and the harder the report reads. Transferable value is the whole game. A business that runs without you is worth more than the same business that runs because of you.

Run the numbers before the buyer does

You cannot fix a gap you cannot see. That is the case for getting your own quality of earnings picture before a buyer builds theirs. When you see the adjustments coming, you have time to address them. When the buyer surfaces them first, you are negotiating from the back foot, defending a number you did not know was soft.

This is also where the timeline becomes the real problem. Most of what raises a normalized EBITDA figure takes time to fix. Cleaning up the books, reducing owner-dependence, diversifying away from one dominant customer, putting recurring revenue under contract. None of it happens in the 30 days before a buyer’s analyst shows up. The owners who get to choose their terms are the ones who started the work years out, not weeks out.

There is a quieter point worth sitting with. A large share of the value you can add before a sale has nothing to do with new sales. It comes from making the business more predictable and less dependent on you, which is exactly what a quality of earnings report measures. You can move your multiple without a single new customer. Most owners never realize that, because they have never seen the gap between what their business is worth today and what it could be worth ready. Our Sell services exist to close that gap on purpose, before you ever go to market.

How Buy and Build Advisors reads a quality of earnings report

Buy and Build Advisors is a Houston-based advisory firm that runs legal, financial, and operational due diligence for lower middle-market owners, from startup through 30 million dollars in revenue. We read a quality of earnings report the way a buyer does, then we go a step further, because numbers on a page only tell you so much.

The difference is the operational lens. A financial analyst can tell you that one customer is 30 percent of revenue. We can tell you whether that relationship is durable, who owns it, and what it would take to make it survive a transition. That comes from doing the work, not just modeling it. Andrew Lamb spent two decades running global operations, including a Fortune 10 background, before helping owners prepare companies for acquisition, growth, and exit. The same operating view that reads risk in a real business reads it in a quality of earnings report.

We bring legal, financial, and operational discipline into one relationship, so an owner does not have to assemble three separate firms to get one honest answer. Our buy-side advisory work puts financial due diligence and a quality of earnings review in the same conversation as the operational read, because that is how you actually understand a deal. The Value Gap Assessment that starts most of our relationships draws on more than 800 valuations built over 12 years. That is the data behind the number, and the number is where every good decision starts.

Clarity before capital. The owners who get the clarity first are the ones who get to decide how the story ends.

Find out what your earnings quality is doing to your multiple

You can keep guessing at what a buyer’s quality of earnings report will say, or you can see the number now, while you still have time to change it. The free 15-minute Value Gap Assessment shows what your business may be worth today, where the gaps sit, and what is quietly holding your multiple back.

Find out what your earnings quality is doing to your multiple

The Value Gap Assessment is indicative and not intended as a formal valuation. Results are powered by Capitaliz and based on the inputs you provide.