A quality of earnings (QoE) review is a detailed analysis of a practice’s historical earnings, done before a sale closes. It answers one question: are the earnings the price is based on real, supported by records, and likely to continue under a new owner? Because dental practices are priced as a multiple of earnings, every dollar a QoE removes can reduce the price by several dollars.
| What it is | What it is not | |
|---|---|---|
| QoE review | A focused test of earnings, add-backs, cash and working capital for a transaction | Not an audit, and not an opinion on the price |
| Valuation | An estimate of what the practice is worth | Usually relies on earnings figures the QoE verifies |
DSOs and private equity buyers commission a QoE on almost every deal. Sellers can benefit from a sell-side QoE done before going to market, so problems are found and fixed on their schedule, not the buyer’s.
1. The Earnings Bridge
The heart of a QoE is a bridge from reported income to the earnings a buyer can rely on. It moves in three layers: reported EBITDA, the seller’s adjustments, and the adjustments the QoE team makes after testing them.
| Step | Amount |
|---|---|
| Net income per tax return | $280,000 |
| + Interest | $12,000 |
| + Entity-level taxes | $5,000 |
| + Depreciation | $38,000 |
| Reported EBITDA | $335,000 |
| + Owner compensation (seller adjustment) | $160,000 |
| + Owner retirement and health insurance (seller adjustment) | $45,000 |
| + Owner vehicle (seller adjustment) | $9,000 |
| + “One-time” marketing campaign (seller adjustment) | $20,000 |
| Seller-adjusted earnings | $569,000 |
| − Marketing campaign reverses: it recurs every year | ($20,000) |
| − Collections not supported by bank deposits | ($15,000) |
| − Rent adjusted to market (owner-owned building) | ($12,000) |
| + Family member on payroll who does not work in the practice | $28,000 |
| − Run-rate cost of an open hygienist position | ($36,000) |
| Diligence-adjusted owner’s discretionary income | $514,000 |
| − Market pay for a replacement dentist (30% of $800,000) | ($240,000) |
| Diligence-adjusted EBITDA | $274,000 |
In this example the seller presented $569,000 of earnings and the QoE supports $514,000. At a 4x multiple of adjusted EBITDA, the net $55,000 of changes would move the price by about $220,000.
Figures are illustrative only.
2. Revenue Quality
What to review
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Proof of cash: tie collections in the practice software to deposits in the bank statements, month by month, for at least the trailing twelve months (TTM)
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Tie bank deposits and software collections to gross receipts on the tax return
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Production vs. collections by provider, with adjustments and write-offs by payer
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Trends by month: collections, new patients, hygiene visits and production per day
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Revenue concentration: share from the selling dentist, from one PPO, and from a few large cases
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Patient and insurance refunds, and credit balances that may need to be repaid
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Cash or card payments that bypass the practice software
Red flags
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Software collections that do not match deposits or the tax return
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A spike in collections just before the sale, or large cases pulled forward
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Growing patient credit balances or unpaid insurance overpayments
3. Expense Normalization
What to review
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Owner compensation, benefits, retirement contributions and perks, with documents for each
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Related-party costs: rent paid to a building the owner holds, family members on payroll, management fees
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One-time costs: confirm with invoices that they will not recur
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Run-rate adjustments: open positions, recent raises, new associates, new fee schedules or lease changes
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Overhead as a percentage of collections compared with dental benchmarks: staff, supplies, lab, rent and marketing
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Expenses paid personally that the practice will need to pay after the sale
Red flags
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Add-backs with no documents, or normal costs called one-time
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Staff paid below market who will expect raises from a new owner
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Supplies or lab far outside benchmarks, which can signal misclassified costs
4. Working Capital and Debt-Like Items
Most dental practices keep cash-basis books, so a QoE also looks at items a buyer may inherit that do not show on the P&L. These are often deducted from the price or settled at closing.
| Item | Why it matters |
|---|---|
| Accounts receivable | Usually kept by the seller; confirm how it will be collected and how patients will be billed |
| Patient credit balances | Money owed back to patients or insurers; a debt-like item |
| Prepaid orthodontic and aligner cases | The buyer may have to finish treatment the seller was already paid for |
| Membership plan fees paid in advance | Services owed after closing for fees the seller collected |
| Accrued vacation and paid time off | Owed to staff the buyer keeps; often settled by the seller at closing |
| Equipment leases and loans | Payments the buyer may assume |
5. Provider and Operational Analysis
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Production and collections by provider: owner, associates, hygienists and visiting specialists
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How much of the earnings depend on the selling dentist staying through the transition
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Specialist and contractor agreements: pay terms and whether they will continue
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Active patients, new patients per month and hygiene recall
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Days and hours open, and production per operatory
What a QoE Report Delivers
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An earnings bridge from reported income to diligence-adjusted ODI and adjusted EBITDA, for each year reviewed and the trailing twelve months
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A proof of cash reconciling the software, the bank and the tax returns
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A schedule of every adjustment with support and the reviewer’s conclusion
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A list of working capital and debt-like items for the purchase agreement
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Key findings and risks to address in the price, the terms or the closing conditions
Earnings drive price. Whether you are buying or selling, a quality of earnings review by a CPA who specializes in dental practices confirms the number the deal is built on, before it is too late to change the price or the terms.