The QoE Haircut

Ed has been telling himself his EBITDA is $5.7M for about 3 years.

Not out loud. He doesn't say it to his CPA, who would correct him. He doesn't say it to Janet, his controller, who would pull up the P&L. He says it to himself, on the drive home, when he's thinking about what the business is worth.

The books show $5.5M. In Ed's head, there are adjustments that "shouldn't really count." His salary. Linda's salary. The Suburban. The country club dues. Ed doesn't have a spreadsheet for any of this. He has a sense that if you cleaned it all up, the real number is somewhere around $5.7M.

The buyer does not see it.

Two numbers that look like the same number

Every used car has two numbers. The owner has one — what the car is worth based on what they paid, what they spent, the sentimental value of a decade behind the wheel. The dealer has another — what the car will fetch at auction next Wednesday, minus reconditioning, minus margin.

Both feel like real numbers. Neither is wrong, exactly. But only one gets paid.

The lever

Every business valuation is the same arithmetic. EBITDA × Multiple = Price.

The multiple is what founders debate at trade association lunches. The multiple is interesting. The multiple is not the lever.

EBITDA is the lever. Every dollar of EBITDA gets multiplied. Lose a dollar of EBITDA, lose 7 dollars of price.

When a buyer says "we'll pay 7× EBITDA," they mean 7× their EBITDA. The number their Quality of Earnings firm produces. Not the number in the founder's head.

The QoE firm is an independent CPA team. The buyer hires them to rebuild the seller's earnings from the books up. They produce a number, with documentation, that the buyer's lender will underwrite against. Whatever the founder has been telling themselves on the drive home is irrelevant the moment the QoE firm opens the books.

Call the founder's number phantom EBITDA. It includes every adjustment the founder believes should count: undocumented add-backs, optimistic normalizations, costs labeled "one-time" that recur every year. Phantom EBITDA feels real because the founder has carried it for years. It is not real because the QoE firm has never seen it.

The QoE firm produces real EBITDA. The two numbers are rarely the same.

What Rachel found

Rachel — the QoE lead from the buyer's accounting firm — sits down with Janet in Meridian's conference room. She has a laptop and a list. She is methodical. She has a question for every line item, and she needs the document that supports the answer.

Ed pays himself $425K. Ed thinks the market for the CEO role is $280K. Ed wants the $145K gap added back. Rachel agrees with the logic and asks for the comp study. There isn't one. She accepts $60K based on industry survey data and rejects the rest.

Linda draws $95K for a role with no job description, no documented responsibilities, and no successor plan. Rachel strikes the full amount and adds $50K. Why? Because it will cost the buyer $145K to replace Linda.

The country club dues, the Suburban, the Christmas bonuses — Rachel walks through each one. Some she accepts with partial credit. Most she doesn't. Each rejection is reasonable. Each one shaves EBITDA.

Documentation is your friend — and if your situation is complex, consider getting a seller-side QoE of your own.

At the end, Rachel produces a number: $5.0M. Ed is $700K light.

The QoE Haircut

The buyer's offer is 7× the QoE number. 7 × $5.0M = $35M. The LOI comes back at $35M. Same multiple Ed had been hearing for years. Different EBITDA.

In Ed's head, the business was worth $40M. The arithmetic was correct. The $5.7M was phantom.

The gap between Ed's number and the LOI is $5.0M. Not lost in negotiation. Subtracted by one CPA team with a documentation standard, before the deal terms were even drafted.

This move has a name. Call it the QoE Haircut. It's the buyer's first cut at reducing the value of the business. It happens before negotiation. It happens before the deduction list starts.

What Ready Looks Like

A founder prepared for QoE has a normalization workbook. Not complicated. Has to exist before the buyer arrives.

The workbook lists every adjustment with documentation: owner compensation with a comp study, personal expenses with receipts and a personal-versus-business split, non-recurring items with evidence they won't repeat.

Founders with this workbook watch the QoE haircut shrink by 70–80%. Founders without it watch their phantom EBITDA evaporate.

For Meridian, none of these were true.

The Ed Moment

Janet calls Ed at home on a Wednesday night.

"Ed," she says. "The QoE came back at $5.0M."

Ed says, "My number is $5.7M."

Janet says, "Their number is what's going in the LOI."

Ed has been telling himself $5.7M for so long that hearing $5.0M from someone he trusts feels like an accounting error. It isn't. Janet has the details in her email.

What this cost Ed: $5.0M.

This is the QoE haircut — the move from Ed's head number ($40M) to the LOI ($35M). It is not a deduction in the diligence sense. It is a recalibration. The deduction list starts at the LOI, not at Ed's head number.

Before the lawyers had drafted the first redline, the QoE haircut shaved $5M off the value Ed had in his head.

The LOI was 7×. Same multiple Ed expected. Just a different EBITDA.

Don't be Ed.