The valuation multiple is applied to EBITDA. But which EBITDA? That is the question a Quality of Earnings review answers. QoE reviews evaluate the sustainability and reliability of earnings — and the difference between reported EBITDA and adjusted EBITDA often surprises sellers.

What Is a Quality of Earnings Review?

A QoE review is an independent analysis of a company's earnings quality — evaluating whether reported EBITDA reflects sustainable, ongoing business performance. The ultimate question is: what is this business likely to earn after closing?

"Transactions are not won in diligence. They are won before diligence begins."

Why GovCon Companies Receive Additional QoE Scrutiny

Government contractors face complexities that increase the importance of QoE reviews. Buyers frequently evaluate contract mix, indirect rates, labor utilization, recompete exposure, backlog quality, billing practices, and compliance infrastructure. Because earnings can be influenced by contract structures and government regulations, buyers often perform deeper analysis than in traditional commercial businesses.

Area 1: Revenue Quality Analysis

The first objective is understanding how sustainable revenue really is — customer concentration, contract concentration, backlog analysis (funded vs unfunded), and pipeline review. Strong backlog creates confidence. High customer concentration creates risk that buyers price into their offers.

Area 2: EBITDA Quality Analysis

This is often the heart of the QoE process. Common EBITDA adjustments include:

The valuation multiple is generally applied to adjusted EBITDA — not reported EBITDA. Understanding this distinction before going to market is critical.

The Five Most Common QoE Findings

Finding 01
Weak Contract Profitability Visibility
Management cannot clearly explain margin performance at the contract or customer level. This is the most common finding across GovCon transactions.
Finding 02
Forecast Accuracy Problems
Historical misses reduce buyer confidence and become a proxy for management quality.
Finding 03
Customer Concentration Risk
Revenue depends too heavily on a small number of customers — creating a risk premium that reduces the multiple buyers are willing to pay.
Finding 04
Working Capital Surprises
Cash requirements are larger than expected, leading to purchase price adjustments that reduce seller proceeds.
Finding 05
Aggressive EBITDA Adjustments
Management's view of earnings differs significantly from the buyer's view — creating a valuation gap that must be negotiated.

Sell-Side QoE Reviews

Increasingly, sellers perform their own QoE review before going to market. Benefits include identifying issues early, improving buyer confidence, reducing surprises, and strengthening negotiation leverage. Many PE-backed transactions now include sell-side QoE reports as standard practice.

Frequently Asked Questions

What is a Quality of Earnings review in GovCon?
A QoE review evaluates the sustainability and reliability of earnings — specifically whether reported EBITDA reflects ongoing business performance. In GovCon, it also examines contract mix, indirect rates, backlog quality, and compliance infrastructure.
What is adjusted EBITDA vs reported EBITDA?
Adjusted EBITDA removes one-time, extraordinary, or non-recurring items from reported earnings to reflect sustainable business performance. The multiple in a transaction is typically applied to adjusted EBITDA, not reported EBITDA.
Who performs a QoE review?
Typically an independent accounting firm with M&A advisory experience. On the buy side, buyers' advisors perform the QoE. Sellers increasingly commission their own sell-side QoE before going to market.
Should I get a sell-side QoE before selling my GovCon company?
Often yes. A sell-side QoE identifies issues before buyers do, allows you to frame EBITDA adjustments proactively, and improves buyer confidence. It also reduces the risk of late-stage retrading.
How does the CFO's role in a QoE process?
The CFO typically leads preparation, validates proposed adjustments with supporting documentation, manages the data room, and serves as the primary financial representative during buyer conversations. A strong CFO can significantly improve QoE outcomes.

Know where you stand — before buyers do.

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Continue Reading

Chapter 9
Financial Due Diligence Checklist
Chapter 7
What Buyers Look for in a GovCon Acquisition
Chapter 11
Top 10 Reasons GovCon Deals Miss Their Target Valuation
Chapter 14
GovCon Contract Profitability Framework™