Earnings Quality or Deal Duality?

Earnings Quality or Deal Duality Dr. Allen Nazeri

Earnings Quality: The Real Deal or Just a Stealth Discount Strategy?

In the world of M&A, there are a few terms that instantly sound impressive; “synergies,” “platform play,” “proprietary advantage,” and of course, the all-time favorite: Earnings Quality. Just say it out loud in a meeting and watch heads nod in reverent agreement like you're reciting scripture.

But here’s the twist. While Earnings Quality (QofE) is an essential tool in assessing a company’s true profitability, it’s also quietly become one of the most clever negotiation weapons in the buyer’s playbook. When used honestly, it can justify a fair price. But when used like a magician’s cape, it becomes a tool of deal duality ; praise the business with one hand and chip away at its valuation with the other.

Let’s unpack this.

Earnings Quality: What It Actually Means

In its purest form, a Quality of Earnings report is designed to help buyers (and sometimes sellers) distinguish between sustainable, recurring earnings and one-time or non-operational anomalies. Think of it like an X-ray of your income statement — stripping away cosmetic adjustments, holiday-season bloat, or that one massive one-time customer deal that everyone pretends will happen again (spoiler: it won’t).

Here’s what a good QofE should do:

• Normalize earnings by removing unusual gains/losses

• Adjust for timing issues (like recognizing revenue too early or expenses too late)

• Clarify working capital trends and cash flow realities

• Identify customer concentration risks and revenue cliffs

Done right, QofE reports help both sides move toward a fair valuation and reduce surprises during due diligence. It’s like showing up to a blind date with a passport, résumé, and a blood test, you’re clearly serious.

Earnings Quality or Earnings Discounting?

Now, let’s talk about the “dark side”, the Deal Duality. This is where things get fun (or frustrating, depending on your role).

Some buyers don’t use QofE to understand the business; they use it to poke enough holes to justify a discount. Here's how it works:

1. Commission the QofE (on your dime or make the seller pay — bonus points).

2. Identify ‘adjustments’ so obscure even the CFO has to Google them.

3. Claim surprise that the company dared to recognize prepaid revenue.

4. Then announce, dramatically: “Given what we’ve uncovered, we’ll need to revisit the valuation.”

Congratulations! You’ve just witnessed QofE Theater. Curtain call optional.

Earnings Quality: Respect It, But Watch for the Angle

Don’t get me wrong; I’m all for financial discipline. But let’s call a spade a spade. When a company with a 30% margin, clean books, audited financials, and a QofE from a reputable firm suddenly gets devalued because “salaries are above benchmark,” you know the buyer’s not seeking truth, they’re hunting for a bargain.

It’s the classic “devalue to negotiate” strategy:

• Praise the business publicly

• Nitpick privately

• Ask for a “recalibrated offer” post-QofE

This is fine, as long as sellers and advisors see it coming.

Earnings Quality: The Seller’s Shield

Sellers: don’t just hand over the QofE and hope for the best. Use it to control the narrative.

• Get your own QofE before going to market (yes, it’s worth the cost)

• Anticipate buyer adjustments and address them before they become ammunition

• Include add-backs that make sense — but don’t go overboard (your dog’s vet bills are not a business expense, even if he’s the office mascot)

• When buyers try to weaponize your QofE, respond with context, not emotion

Also, remember this golden rule: just because a buyer says something should be adjusted doesn’t mean it has to be.

Final Thoughts: Keep It Clean, Keep It Real

In the end, Earnings Quality is like deodorant — everyone needs it, but some buyers wear too much to cover up something else.

If you’re a seller, respect the QofE, but stay sharp. If you’re a buyer, use it to understand value — not just reduce price. And if you're an advisor, be ready to referee this delicate dance and call out “discount theater” when it starts looking like Broadway.

Because whether you're on Team Buy or Team Sell, one truth remains:

A clean set of books deserves a clean deal — not a curtain call for discounts.

He holds a Dental Degree from Creighton University and an MBA in M&A and Investment Banking from the University of Bedfordshire. Dr. Allen is the author of "Value Engineering: Strategies to 10X the Value of Your Clinic and Dominate the Market!" and the brand new book "Selling Your Healthcare Company at a Premium". Dr. Allen offers a free valuation to business owners ready for a partial or complete exit strategy. Dr. Allen collaborates with strategic buyers, private equity firms, and institutional investors, taking direct accountability for the annual successful sell-side representation of nearly $750M in enterprise value.

To have a confidential discussion about your company and receive a free valuation, please email Allen@ahcteam.com or Allen@ahcpexits.com

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