A Quality of Earnings proves the earnings were real. The operator read proves they survive new ownership: owner dependency, concentration, bench depth, systems, revenue durability, and calls to the customers themselves.
A Quality of Earnings tells you the earnings were real. It is historical by design, and that is not a flaw: it is the job. But a buyer is not buying last year. They are buying next year, from a seller who is leaving.
The operator read is the second half of that question. It is a defined scope of eight workstreams, run by an operator who has sat in the seat, and on a lower-middle-market deal it is usually where the finding that changes the price actually comes from.
It is not a market study and it is not a customer survey. It is a structured read of whether this business, without this owner, still works.
On a lower-middle-market deal the risk is usually a handful of accounts, and whether they were buying the business or buying the owner. That does not show up in the general ledger, so we run the customer work inside the same scope as the numbers.
A QoE can flag that one customer is 30% of revenue. It cannot tell you whether that customer stays when the person they actually buy from walks out the door.
Licences, know-how, the supplier who gives them terms as a favour. Some of it is documented. Most of it is in one person's head.
Proof of cash proves the totals reconcile. It does not prove the costs sit in the right place, and margin by line can be materially wrong while the total is right.
An add-back that removes a cost the business will absolutely incur again is not an add-back. It is a future liability, priced today as earnings.
A trailing average computed in the slow season sets a peg that leaves the buyer short of cash in the busy one.
Debt service is calculated independently of the QoE. A clean report and a declined loan are entirely compatible outcomes.
Adapted from What a Quality of Earnings Report Won’t Tell You Before You Buy, Jared Luegers, CFA.
| Workstream | What it produces |
|---|---|
| Owner dependency & key-person risk | A dependency rating with evidence behind it, the seats map, and the transition risk named rather than implied. |
| Concentration, deep | The concentration exhibit and a revenue-at-risk figure with its assumptions stated. |
| Management & bench depth | A bench-depth read, single points of failure named, retention exposure. |
| Systems, process & cadence | Systems maturity, the documentation gap list, and whether the operating cadence exists at all. |
| Revenue durability | The recurring-revenue claim tested rather than accepted. |
| Customer reference calls Buy-side only, up to six | A reference-call log, themes synthesised. Never attributed to a named customer in the report without consent. |
| Market & competitive read Bounded: a named competitor set plus desk research | The competitor set, a structural read, named risks. This is not primary market research and the scope fence says so. |
| Forward action plan | What to do in the first ninety days, written to be useful after the deal rather than only during it. |
Scoped to the deal. Runs standalone or alongside a Quality of Earnings, which is how most buyers take it.
The Kill List. Before anyone spends money on diligence, write down the measurable things that would end the deal, ranked. Any customer over 30%. Cash flow 20% below the projection. Cannot operate without the seller. Then diligence tests the list instead of wandering.
The add-back test. Every adjustment clears three gates or it comes off: a source document, a credible reason it will not recur, and a market benchmark showing it was abnormal. An add-back has to make the number honest, not just bigger.
At roughly four times earnings, every unsupported dollar of add-back is about four dollars of price. That is why we show you the adjustments we rejected, not only the ones we allowed.
The interviews and the verdict are done personally, so the operational work is capacity-constrained by design. Red-Flag screens do not count against it. If the calendar is full we will tell you the date rather than take the work and be late.
Reference calls are buy-side only, and never attributed to a named customer without consent.
Tell us the deal and we will tell you which scope fits, usually within one business day.
Get a scoped number See how the QoE runs“Consistent knowledge in the finance and scaling of our company. We have three complex divisions, and his ability to navigate and create factual strategies has been a great help.”
Thomas Lauth, Lauth Investigations
Verbatim client review.