A Q of E review is a forensic financial audit commissioned by the buyer after the LOI, typically costing $25K–$150K for middle-market transactions. Focus areas: add-back validation, revenue quality, working-capital normalization, accounting methodology consistency. The seller's objective is to preemptively document every add-back so that the Q of E team's conclusions match — or exceed — the Pro Forma EBITDA already presented.
The five defensive folders.
Owner & family compensation — the largest single add-back.
Documents: W-2s and K-1s (last 3 years) for all owners and family members on payroll. Detailed job descriptions — one for the owner's current role (e.g., "CEO + Lead Rainmaker + Operations Manager"), one for the proposed replacement role (e.g., "Agency Manager — non-selling"). Market salary comps (Salary.com, ZipRecruiter, MarshBerry studies). Separation Affidavits — signed statements from family members confirming they will not continue employment post-close.
Personal expenses — the lifestyle defense.
General Ledger detail export of specific accounts (Travel, Meals, Auto, Dues & Memberships) for TTM. Best practice: highlight specific rows claimed as personal — do not use percentage estimates ("50% of travel is personal"); annotate exact charges (the Delta flight to Disney, the Orlando hotel). Credit card statements with personal charges highlighted. Vehicle lease agreements for vehicles the owner will retain personally. Club membership invoices (be prepared to demonstrate the membership was not used for client entertainment — if a top client attended a golf outing, the reviewer reclassifies the membership as marketing, denying the add-back).
Real estate & rent — the related-party add-back.
Current lease agreement between the operating company (the agency) and the holding company or individual that owns the real estate. Document square footage, rate per square foot, lease term. Broker Opinion of Value (BOV): a formal letter from a local commercial real estate broker stating the fair market rent per square foot for the building class and location. This is the primary evidentiary document — without it, buyers dispute the add-back. Alternative: a CoStar or LoopNet market report showing asking rents for comparable properties (less authoritative than a BOV but acceptable in lower-stakes transactions).
One-time / non-recurring items — the recurrence test.
Legal settlement documentation — finalized settlement agreements proving a lawsuit is fully resolved, paid, and closed. Open or contingent matters are not add-backs — they are contingent liabilities. Professional services invoices tied specifically to one-time events (M&A advisory, litigation counsel, systems implementation). Project contracts (CapEx vs OpEx distinction): for IT upgrades, provide the Statement of Work demonstrating finite, non-recurring scope. Critical: recurring SaaS subscriptions are NOT add-backs — only the one-time implementation or setup fee qualifies. Q of E reviewers specifically test this distinction.
Synergy & pro forma (advanced) — buyer-favorable add-backs.
Duplicate Systems List — software the seller's agency pays for that the buyer already has under a master contract (standalone CRM that migrates to the buyer's Salesforce enterprise). Buyers can often add back 100% of duplicate system costs as synergy. Insurance Policy Dec Pages (current E&O, Cyber, BOP declarations). Large buyers — PE-backed platforms, regional carriers — often self-insure or operate under a master policy and add back the full insurance premium as synergy. Pre-presenting these as buyer-favorable add-backs captures value for cost savings the buyer will realize immediately post-close.
The Master Add-Back Schedule is the single most impactful document in any Q of E review. Excel workbook columns: GL Account, Expense Description, Vendor, Dollar Amount, Data Room Reference (hyperlinked to supporting PDF). When the Q of E reviewer sees disorganized folders, they assume incompetence — and incompetence means soft add-backs. When they see a Master Schedule with hyperlinked evidence for every penny, their perception shifts to High Operational Maturity. That perception consistently defends the top of the multiple range vs the bottom — hundreds of thousands to millions in purchase price difference.
Terminology on this shelf
- Quality of Earnings (Q of E) Review
- Forensic financial audit commissioned by the buyer to validate the seller's Pro Forma EBITDA and add-back claims.
- Master Add-Back Schedule
- Excel workbook mapping every EBITDA add-back claim to a specific hyperlinked document in the VDR.
- Separation Affidavit
- Signed statement from a family member on the payroll confirming they will not continue employment post-close.
- Broker Opinion of Value (BOV)
- Formal letter from a commercial real estate broker establishing fair market rent for the agency's location.
- High Operational Maturity
- Buyer perception signal conveyed by a well-organized Master Add-Back Schedule; associated with defending the top of the multiple range.