Quality of earnings: what buyers test before they pay

What a QoE actually tests

A QoE is not an audit. An audit asks whether historical financial statements follow accounting standards; a QoE asks what the business really earns on a normalized, ongoing basis, from a buyer's point of view.

Adjusted EBITDA

Each add-back, such as owner compensation above market, personal expenses, and one-time costs, is tested and either accepted, reduced, or rejected.

Revenue quality

Payer mix, concentration, recurring versus one-time revenue, and whether billed revenue turns into collected cash.

Proof of cash

Reported revenue and expenses are reconciled to bank statements, which catches timing and recording problems.

Net working capital

A normalized level of receivables and payables, which becomes the working capital target in the purchase agreement.

Why it matters so much in healthcare

Healthcare revenue is full of estimates: claims not yet paid, denials not yet worked, retroactive rate changes, and payer recoupments. A QoE provider will look at how your billed revenue converts to cash by payer, how old your receivables are, and whether any revenue depends on a rate, contract, or authorization that may not continue.

Every dollar of adjusted EBITDA a QoE removes is multiplied by the purchase multiple. At a 6x multiple, a $100,000 add-back that does not survive diligence costs you $600,000 of price.

Sell-side vs. buy-side QoE

Most buyers commission their own QoE once a letter of intent is signed. A sell-side QoE, which you commission before going to market, lets you find and fix problems on your timeline, present add-backs that have already been tested, and reduce the chance of a price cut late in the process. For smaller practices the cost may not be worth it; for larger ones, or where the books are complex, it often is.

Why diligence is getting deeper

SRS Acquiom's claims data shows buyers doing more thorough diligence than during the 2021 and early 2022 deal surge, and pursuing more claims after closing. Claims for breach of the no undisclosed liabilities representation, which appeared in 97 percent of 2024 deals, rose from 11 percent of indemnification claims in its 2022 report to 24 percent in its 2024 report.

For a seller, a QoE is the best defense against that trend: the more of your numbers that have been tested before signing, the fewer surprises can surface afterward.

Preparing for a QoE

The fastest QoE engagements start with data that already reconciles.

How Lartico fits in

Lartico introduces home care and behavioral health owners to buyers that understand how these businesses earn money. Knowing which buyers you will speak with helps you decide whether a sell-side QoE is worth it before you go to market.