Guide
4 min read
By MSP Margin Editorial
A quality-of-earnings review, often shortened to QoE, is a financial investigation usually commissioned by a buyer or lender before a deal closes. The team rebuilds your earnings from the underlying records, tests whether reported profit is supported, and adjusts it for one-time and non-operating items. The result often becomes the earnings figure the price is based on.
You cannot control what the reviewers find, but you can control how much of their time is spent fixing your books instead of confirming them. Clean records shorten the process and reduce the number of surprises that turn into price discussions.
Get the books onto an accrual basis
Many smaller MSPs keep books on a cash basis because it matches tax filings and is easy to maintain. A QoE team will convert to accrual anyway, and doing that conversion yourself, with time to review it, is much better than watching someone else do it under deadline.
Here is an illustrative example with round numbers. An MSP bills a client $24,000 on December 1 for twelve months of service running December through November. On a cash basis, the full $24,000 shows up as December revenue when the payment arrives. On an accrual basis, only $2,000 belongs in December and the remaining $22,000 is deferred revenue that will be earned over the following eleven months. If the review period ends December 31, the cash-basis books overstate that year's revenue by $22,000. A handful of annual prepayments like this can move earnings meaningfully in either direction.
Beyond revenue, accrual books should record unpaid vendor bills, prepaid tool subscriptions, accrued payroll and bonuses, and any commissions earned but not yet paid.
Reconcile everything that has a balance
Reviewers start by checking that the balance sheet is real. Before they arrive, every account with a balance should be reconciled and supported:
- Bank, credit card and merchant accounts, monthly, with no stale reconciling items.
- Accounts receivable aging that ties to the general ledger, with old balances either collected or written off.
- Accounts payable aging that ties to the ledger.
- Deferred revenue schedules by client that tie to the ledger balance.
- Payroll records that tie to payroll tax filings and to wages in the books.
- Loan balances that match lender statements.
Unreconciled differences invite the question of whether other numbers are also wrong.
Support revenue and document add-backs
Revenue testing usually traces a sample of revenue from the ledger to invoices, from invoices to agreements, and from agreements to cash received. Make that easy. Keep signed agreements organized by client, make sure billing in your PSA matches the agreements, and be able to show recurring revenue separately from projects, hardware and pass-through licensing.
For add-backs, the adjustments you believe should be added back to earnings, the standard is documentation. Each one needs a short written explanation, the amounts by period, and the records that support it: invoices, payroll reports, or agreements showing the cost will not continue. An add-back with no paper behind it is usually rejected or argued over, and the argument often goes against the seller.
A timeline for what to clean up first
The earlier you start, the more months of clean history you will have. A practical sequence:
| When | Focus |
|---|---|
| 12 or more months before a process | Move to accrual books, set a monthly close, separate revenue types in the chart of accounts |
| 6 to 12 months before | Reconcile all balance sheet accounts, clean up AR and deferred revenue, match billing to agreements |
| 3 to 6 months before | Build the add-back schedule with support, organize agreements and payroll records, document unusual items |
| Final weeks | Prepare a monthly trailing twelve-month package, a list of known issues with explanations, and one person to answer questions |
The known-issues list deserves emphasis. Reviewers will find problems. Problems you disclosed first, with an explanation and a number attached, tend to be treated as understood. Problems they discover on their own tend to raise doubts about everything else.
A sell-side QoE, commissioned by the owner before going to market, is another option some sellers consider. It costs money up front but can surface issues while there is still time to fix them.
This guide is general information, not financial, legal or tax advice for your situation. Before starting a sale or financing process, work with your CPA, attorney and other advisors on what preparation makes sense for your business.