Lessons from 500+ QoE Reports: Which Adjustments Matter?

This Week in ETA:

Searchers: I loved this post about an entrepreneur who based his entire capital-raising strategy on handwritten notes — and saw remarkable results within six months. The full story is worth a read, but the key takeaway is simple: as AI makes outreach faster and more scalable than ever (better emails, refined call scripts, endless data at our fingertips), going back to basics can set you apart. A handwritten letter to a seller can signal sincerity, care, and true interest in a way automation never will. We’ll be incorporating handwritten outreach to sellers in our off-market bootcamp next week, and I’m excited to report back on what we learn.

Investors: This week at Capital Camp, a number of speakers talked about how product/market fit is just as important for investors as it is for entrepreneurs. Sometimes we don’t apply the same analysis of “right to win” and competitive advantage that we use when a searcher is buying a business to our own investing. Focusing on asset classes where we have the most personal knowledge makes us more likely to see the opportunities that others miss, and avoid the pitfalls that novices encounter. Incidentally, this is why I don’t invest in real estate!

Partner Perspective:

This week, I am thrilled to introduce Caleb Basile of QoE Prep, our trusted Quality of Earnings partner. Fast, experienced, and thorough, Caleb and his team are a boutique QoE specialist group that has worked on a combined total of over 500 deals. Unlike traditional accounting firms, QoE Prep focuses exclusively on Quality of Earnings — no tax, audit, or other distractions — which means they’re laser-focused on helping you analyze your target company and delivering clear, actionable insights in 2 weeks.

Caleb comes highly recommended by the search community, and his reputation for rigorous, investor-focused analysis is well-earned. If you’re entering diligence or evaluating a deal, Caleb and QoE Prep are an invaluable resource we’d highly recommend.

Caleb Basile:

Adjusted EBITDA is central to valuing a business in an acquisition. If you’re unsure whether a target’s EBITDA reflects true, recurring earnings, a Quality of Earnings analysis helps identify the necessary adjustments and reveal the business’s real earning power. You can read more on this topic here - and if you’re preparing for an acquisition and want a comprehensive look at Adjusted EBITDA, please reach out!

We adjust EBITDA to remove items that are non-recurring, non-operational, owner-related, or unlikely to continue under new ownership. The objective is to understand what the business will realistically earn going forward.

Typical adjustments include:

1. One-time legal or consulting fees

The “bad breakup” costs — those legal bills from that totally unique lawsuit. We back them out to show what earnings look like without drama.

2. Personal or discretionary expenses

When “client entertainment” means a family trip to Cabo. We strip out the lifestyle perks so you see what the business earns, not what it funds.

3. Above- or below-market compensation

Uncle Rick makes $450K for bringing donuts, or the owner pays herself $40K “for the tax savings.” We normalize to real-world pay.

4. Related-party transactions

That $1 warehouse lease from the cousin? Yeah, no. We adjust these to market terms, not “family discount” terms.

5. Distributions that brokers add back

This one’s classic broker math. They’ll try to add back owner distributions because “it’s not an expense.” True, but it’s already baked into the net income. Add it back again and you’ve double-counted like a rookie.

Getting Adjusted EBITDA right matters because valuation, financing, and deal structure all anchor to this number. A clean, well-supported figure reduces surprises and helps both sides align on price. If you're preparing for diligence and want clarity around earnings quality — my team and I are here to help.

Plus:

• Some free (and important) legal advice from Eli Albrecht on making the binding sections of your LOI actually binding.

• Part two of the SMBootcamp article series I shared last week about positioning your deal with investors and lenders focuses on clearly articulating why you’re qualified to run the business. It also highlights the importance of demonstrating that you understand the risks involved and have thoughtful plans to address them.

Question:

Hit reply and tell us - What diligence questions would you like to see Caleb address?