Why Sellers Are Running Diligence on Themselves First

Global deal value reached $1.7 trillion in the second quarter, the highest quarterly total this century, while the number of completed deals fell to decade lows. Buyers are concentrating capital on fewer targets and examining each one harder before they commit. A growing share of sellers now respond by commissioning the same analysis a buyer would run, before the first buyer ever signs a confidentiality agreement.

A Review Built to Test Your Profits

A quality of earnings review, usually shortened to QoE, is an independent analysis that stress-tests a company's reported profits to distinguish sustainable earnings from one-time gains. It is not an audit. An audit asks whether the financial statements comply with accounting standards. A quality of earnings review asks a different question: will these earnings continue under a new owner?

The centerpiece is adjusted EBITDA, which is earnings before interest, taxes, depreciation, and amortization, modified to remove items that will not recur after a sale. A one-time legal settlement comes out. An owner's above-market salary gets restated to what a replacement executive would cost. Revenue pulled forward from next year's contracts gets pushed back where it belongs. The review also examines revenue trends by customer and product, the monthly rhythm of working capital (the short-term assets and liabilities a business needs to operate), and whether reported revenue can actually be traced to cash arriving in the bank.

Buyers have commissioned this work for years. What has changed is who goes first. Sellers increasingly hire an independent accounting firm to run the analysis before going to market, a practice known as sell-side QoE, so they can see their company the way a buyer will.

Why the Bar Keeps Rising

The current market explains the shift. With deal counts at decade lows and capital concentrated on fewer transactions, buyers can afford to be selective, and their diligence reflects it. Advisory surveys through mid-2026 describe a consistent pattern: buyer risk tolerance has declined, and the scope of financial diligence has expanded from static document review to dynamic modeling of revenue sources, EBITDA adjustments, and forecast reliability. Industry analyses report that diligence findings routinely move valuations by 15 to 25 percent.

The arithmetic makes the stakes concrete. Middle-market private equity deals have priced in a stable band of roughly 7.2 to 7.5 times EBITDA since mid-2024. A $400,000 downward adjustment to earnings, a routine finding when addbacks are loosely documented, translates to roughly $3 million of purchase price.

Sellers who first learn about these adjustments from the buyer's diligence report are learning about them deep in exclusivity, after the process's competitive tension is gone.

What Changes When the Seller Goes First

The practical case for sell-side QoE rests on four effects.

First, problems get found while there is still time to fix them. A review commissioned six to twelve months before a sale process surfaces revenue recognition issues, undocumented reserves, and messy intercompany accounts while the owner can still correct them.

Second, the seller controls the adjustment narrative. Every sale process involves a negotiation over which addbacks are legitimate. A seller who arrives with a documented adjustment schedule, prepared by an independent firm, frames that conversation. A seller without one reacts to the buyer's schedule, and the buyer's version rarely errs in the seller's favor.

Third, prepared numbers keep more bidders engaged longer. Buyers and their lenders receive a coherent financial package instead of assembling one themselves, which shortens their diligence timeline and keeps the process competitive. Competitive tension, more than any negotiating tactic, is what holds price.

Fourth, preparation shrinks the room for a retrade, which is the practice of cutting the agreed price late in the process based on diligence findings. Retrades happen during exclusivity, when the seller's alternatives have gone home. Numbers that have already survived independent scrutiny leave less for a buyer to find and less justification for a late price cut.

What the Review Typically Finds

The findings that move price cluster in predictable places. Revenue recognition and cutoff issues lead the list: revenue recorded before it is earned, or timed around period ends to smooth results. Addback quality comes next. Costs labeled one-time have a habit of recurring every year, and a buyer's team will check whether the non-recurring legal fees appear in all three years of the statements.

Owner-related items are almost universal in founder-held companies: compensation above or below market rates, family members on payroll, personal expenses running through the business. None of these are fatal, but each requires documentation to convert from a red flag into a clean adjustment.

Customer concentration is the finding with the most direct multiple impact. Above roughly 20 to 25 percent of revenue from a single customer, buyers commonly reduce the offered multiple by half a turn to a full turn of EBITDA, or restructure the deal with earnouts tied to that customer's retention. Concentration cannot always be fixed before a sale, but a documented retention history and contract analysis blunt the discount.

Finally, the review tests working capital and cash conversion. A normalized twelve-month working capital analysis supports the valuation during the process and sets up a defensible peg, the working capital target in the purchase agreement that determines post-closing adjustments. Sellers who skip this work often win the headline price and lose part of it back after closing.

What to Watch Next

Three developments will shape diligence over the next few quarters. Buyers' diligence teams are adopting artificial intelligence tools that process data rooms in days rather than weeks, which means anomalies surface earlier and follow-up questions arrive faster. Buyers are also pushing more analysis ahead of the letter of intent, so preliminary numbers now carry weight they did not carry two years ago. And sell-side QoE is moving down-market: once associated mainly with larger transactions, it has become common in deals well below $50 million as buyers apply the same standards to smaller targets.