Quality of Earnings

Normalised EBITDA (often used interchangeably with adjusted EBITDA, though adjusted EBITDA usually means a company's own measure of what it excludes) is a company's earnings before interest, tax, depreciation and amortisation, restated to show the sustainable earning power a buyer would inherit. The reported figure is adjusted to remove one-off items, owner-specific costs and non-market arrangements — an owner's salary above or below the market rate, personal expenses run through the business, exceptional legal costs, or the effect of a related-party contract — and to add back or strip out anything that will not recur under new ownership.

The comprehensive investigation and analysis of a business prior to an investment, acquisition, or partnership. Due diligence covers financials, legal, commercial, technical, and operational areas, and increasingly includes assessment of intangible assets and productivity metrics.

A comprehensive due diligence exercise commissioned and paid for by the seller of a business prior to a sale process, with the resulting reports made available to prospective buyers. VDD typically covers financial, tax, commercial, and legal matters and is prepared by independent professional advisors.

Reverse due diligence is diligence a seller, or the management team of a target, carries out on the buyer. In any deal where the seller retains an ongoing interest — an earn-out, a rollover of equity into the enlarged group, or a management team joining a private-equity platform — the buyer's quality matters as much to the seller as the reverse.

A management presentation is the session, and accompanying deck, in which the leadership of a business being sold presents it to a serious buyer during due diligence. It goes beyond the information memorandum: management talk through the strategy, the numbers, the customer base, the team and the growth plan, and answer the buyer's questions directly.

A disclosure letter is the document a seller delivers alongside the sale and purchase agreement to qualify the warranties they are giving. Warranties are statements that the business is in a particular condition; the disclosure letter sets out the exceptions — the facts that make a warranty untrue or partly untrue — so that the buyer takes the business knowing about them and cannot later claim for what was disclosed.

A specialist insurance policy used in M&A transactions that covers losses arising from breaches of the seller's warranties and representations in the sale and purchase agreement. W&I insurance shifts the risk of warranty claims from the seller to an insurer, enabling cleaner exits for sellers and reducing the need for escrow holdbacks.

A specialist insurance product used in M&A transactions that covers the buyer against financial losses arising from breaches of the seller's warranties and representations in the sale and purchase agreement. W&I insurance has become standard in European PE transactions, enabling cleaner exits (as the seller's liability is capped or eliminated), facilitating auction processes, and allowing PE funds to distribute sale proceeds to LPs without retaining escrow reserves.

Quality of Earnings: What a QoE Report Tests Before a Sale

What a quality of earnings report covers, sell-side vs buy-side QoE, how it differs from an audit and VDD, and how findings move the price.

Acquisition Due Diligence: The Operator's Checklist

Where quality of earnings sits in the diligence process.

AI Due Diligence Framework for Private Equity

What is acquisition due diligence?

Acquisition due diligence is the structured verification of what you are buying — financial, legal, commercial, tax, people and, crucially, the intangible assets that make up most of the value — before you commit.

What is my business worth to a buyer?

A buyer applies a multiple to your normalised earnings and sets that multiple on the quality of your intangible assets — brand, customers, technology, processes and people — not on last year's profit alone.

How much does it cost to sell a business?

Expect adviser or broker fees, legal fees and, often, tax on the gain. Fees vary widely by deal size and complexity; larger deals typically pay a corporate finance adviser a success fee plus legal costs.