Capital partners commonly expect a third-party quality of earnings report before they commit equity to an independent sponsor's deal. What they read for is specific: adjusted EBITDA with documents behind the adjustments, revenue tied to bank deposits and filed tax returns, a working capital analysis, and the company's own answers to the open questions. The sponsor usually engages the report. It has to hold up when a capital partner reads it without the sponsor in the room.
An independent sponsor finds the deal first, signs the LOI, and then raises equity for that one deal. The capital partners are deciding on a single company, often within the exclusivity window, and much of what they know about it comes from the sponsor and the CIM.
The sponsor is commonly paid in part when the deal closes. That is how the model works, and capital partners know it. A report prepared by an outside firm, built from source documents, gives them figures that do not depend on the sponsor's reading of the business or the company's marketing material.
Capital partners also commonly back more than one sponsor and see many deals. They tend to read a QoE quickly and go straight to the places where a price usually moves.
The questions are usually the same, and a full QoE answers them in specific places.
| What the capital partner asks | Where the QoE answers it |
|---|---|
| Is the revenue real? | Cash proof and bank statement reconciliation, tying reported revenue to deposits by month |
| Do the books match what was filed with the IRS? | Reconciliation to three years of filed tax returns and IRS transcript data |
| Which add-backs have documents behind them? | Documented add-backs and adjustments, with the support and the related questions |
| Are margins steady, or is the trailing twelve months an outlier? | Trend and margin analysis |
| How much depends on a few customers? | Customer analysis, including concentration |
| How much cash does the business need to run? | Working capital analysis |
| How far is the CIM from the tested figures? | CIM reconciliation |
| Can the business carry the planned debt? | Five-year monthly projection model |
| What did the company say about the open items? | Full management Q&A |
The management Q&A carries weight in a sponsor deal. Capital partners commonly want to read the company's answers in its own words, with open items marked as open, rather than a summary of them.
Many CIMs for lower-middle-market companies present adjusted EBITDA with a list of add-backs. Some of those hold up and some do not. The usual problems are add-backs with no document behind them beyond the owner's description, "one-time" costs that show up in more than one year, and owner pay that is below what a hired manager would cost.
The last one is specific to sponsor deals. A sponsor often does not plan to run the company day to day. If the owner drew a salary below market for the role, someone has to be hired at market pay after closing, and that cost reduces earnings.
An illustration with round numbers. A CIM shows $2,000,000 of adjusted EBITDA. A QoE finds $150,000 of add-backs with no documents behind them. The owner drew $100,000, and a general manager to replace the owner costs $250,000, a $150,000 adjustment. An $80,000 cost presented as one-time appears in two of the last three years. Tested adjusted EBITDA is $1,620,000. At a 5 times multiple, the $380,000 difference is $1,900,000 of price. Whether the multiple holds is a negotiation. The report gives the sponsor and the capital partners a documented figure to negotiate from. More on which add-backs tend to hold up is in which add-backs survive diligence.
The purchase agreement often sets a working capital target, sometimes called a peg, that the business is expected to deliver at closing. If the target is set too low, the buyer may need to put cash into the business soon after closing. For a sponsor, that cash comes from the same capital partners who just funded the deal.
A working capital analysis shows the level of receivables, inventory and payables the business normally runs on, by month, so the target rests on the company's history rather than a single balance sheet date. How the target is written into the purchase agreement is for your attorney.
Commonly, the sponsor engages the report and shares it with the capital partners. Lenders set their own requirements, and some will accept a report the sponsor engaged while others want their own.
Some sponsor deals use SBA 7(a) financing. Under SBA SOP 50 10 8.1, effective October 1, 2026, Initial Acquisition and Business Expansion loans where the business purchase price is $3 million or more need a QoE from an independent financial professional engaged by and acting on behalf of the lender. The threshold is the price in the purchase agreement less owner-occupied real estate at appraised value. The buyer's equity injection and any note carried back by the owner are not deducted. On those loans, a report the sponsor ordered alone does not meet the rule. Confirm with your lender how they apply it to your deal.
Ask the lender and the capital partners early whether one report can serve both. Getting both answers before an engagement letter is signed avoids paying for the same work twice.
The scope is the same ten procedures listed on the quality of earnings page, whether a sponsor, a searcher, a buyer or a lender engages us. Our fee is $7,500 flat for SBA-sized deals, whether or not SBA financing is used. Sponsor deals are often larger than SBA size. Those are scoped and priced to the work after a call, and the fee is quoted before work starts. There is no hourly billing.
An added fee applies when the company has no financial statements and they have to be built, or when the deal includes more than one business, as some sponsor deals that combine companies do. That fee is quoted once the documents are in. Details are on the pricing page.
The deliverable is a full report in a slide deck plus the workbook, walked through on a call. The workbook carries the monthly P&L, the reconciliations, the add-back support and the projection model, so a capital partner can trace a figure back to its source. Sample reports are available on request. More on how we work with sponsors and capital partners is on the who we serve page.
Commonly after the LOI is signed, inside the exclusivity period, and before the capital partners make a final commitment. The work generally takes two to four weeks from receipt of documents, and the company's response time sets most of the pace. Timing is covered in should you get a QoE before or after the LOI.
No. It is the same ten procedures, starting with cash proof and reconciliation to three years of filed tax returns and IRS transcript data, and ending with a risks and opportunities summary and a full management Q&A.
The report says so plainly and shows the remaining difference rather than estimating it. Capital partners commonly treat those items as questions to resolve before closing.
No. A QoE tests earnings. Entity structure, purchase agreement terms and the tax treatment of the deal are for your attorney or tax adviser.