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I Didn't Plan Any of This

The Insurance Policy Most Founders Skip

If you're getting close to $20 to $25 million in enterprise value, there's a seat on your M&A team that a lot of founders don't know exists: an outsourced CPA firm that specializes in something called a quality of earnings study, or Q of E.

Here's what they actually do. They take your last three to five years of financials, along with your projections going forward, and they assess whether your future revenue is likely to hold and whether your books are well captured. No surprises hiding in the numbers. No significant issues nobody caught. Just an independent, third-party look at whether your financials are what they appear to be.

It's not cheap. Depending on the size and complexity of your deal, a Q of E can run anywhere from $25,000 to $125,000. I get why that number makes people pause.

But think about it as insurance, not an expense. If you're selling a business for $50 million, a $50,000 insurance policy is worth every penny, whether it comes back and tells you there are three things you need to fix before going to market, or it comes back with a clean stamp of approval. Either outcome is valuable. One protects your timeline. The other protects your leverage.

Here's where it gets confusing for a lot of founders. People assume Q of E is something buyers do, not something sellers pay for. And that's true, buyers almost always run their own Q of E during diligence. But you can also choose to do your own sell-side Q of E before you ever go to market.

The difference is simple. If you skip it, you're not avoiding the process. You're just choosing to be on defense instead of offense.

When your buyer's team runs their own Q of E, their whole job is to poke holes in your numbers. If you've already had a trusted third party stress test those same numbers ahead of time, you're walking into diligence with someone in your corner who's done this before, whose reputation is on the line right alongside yours, and who can help you defend what they've already validated.

That's not a person you're paying every week. But it's someone worth having on your team well before you need them.

1️⃣ Am I getting close to the $20 to $25 million range where a Q of E starts to make sense?

2️⃣ If a buyer's team dug into my last three to five years of financials today, am I confident there's nothing that would surprise me?

3️⃣ Have I been thinking of Q of E as a buyer's expense, without realizing I could run my own first?

4️⃣ Would I rather find out about a problem in my numbers now, on my terms, or later, on a buyer's terms?

5️⃣ Do I have a trusted, independent resource who could stand behind my financials if a buyer started asking hard questions?

☑️ Get honest about your deal size: If you're approaching $20 million or more in enterprise value, start researching what a sell-side Q of E actually looks like for a business your size.

☑️ Talk to your current accountant about gaps: Ask directly whether your books would hold up to an outside CPA firm's scrutiny. If the answer is uncertain, that's worth addressing now, not during diligence.

☑️ Decide: offense or defense: If you're heading toward a sale in the next 12 to 18 months, decide now whether you want to walk in prepared or wait to react to what a buyer's team finds.

That's all for this week. A Q of E isn't about proving your business is perfect. It's about knowing exactly where you stand before someone else tells you.

If you want to talk through whether this makes sense for your business, reply to this email or email me directly at [email protected].

Talk next week,

Brian Dukes

Managing Partner at Exitwise