Your earnings can look strong on paper and still rest on software, vendors, and people a buyer can’t count on after close. A quality of earnings review focused only on historical results can miss technology-dependent costs. That blind spot is where purchase price reductions often begin.
If you’re selling, raising capital, or acquiring a technology-dependent business, ask a plain question: What will it cost to run this company on day one after close? The answer reaches past historical results. It includes cloud commitments, software licenses, security gaps, data problems, undocumented systems, and future operating cost.
The financial review still matters. The technology section makes the earnings story harder to overstate.
Key takeaways
- A quality of earnings review tests whether the business can produce sustainable earnings after close. It includes the real cost of systems, vendors, people, security, and growth.
- Technology spend may affect adjusted EBITDA, working capital, purchase price, debt-like items, and deal structure.
- Canceled platforms aren’t add-backs until evidence shows the capability won’t remain in the future run rate. Label technology costs as non-recurring items only when that evidence exists.
- Your best defense is a clear evidence file that connects every material technology fact to an owner, a cost, and a deal consequence.
What a quality of earnings technology section should answer
There is no universal template that forces every QoE report to include a technology chapter. Still, mergers and acquisitions no longer let financial due diligence and technology due diligence operate as separate conversations. The two workstreams must connect.
Financial diligence covers sustainable earnings, cash flow, revenue quality, customer concentration, working capital, and balance sheet analysis. Technology work tests whether the systems behind those numbers can keep producing them. Those systems also determine whether reported results can convert into operating cash flow.
If the CRM does not match invoicing, your revenue analysis has a problem. If fulfillment relies on spreadsheet workarounds and one contractor’s memory, your margin may be less durable than it appears.
It is not a financial audit
An audit evaluates whether historical financial statements fairly present results under the relevant framework and accounting policies. A quality of earnings review asks a transaction question: are these earnings repeatable after the business changes hands?
An AICPA guide to audits, reviews, and compilations helps clarify why an audit has a different purpose and scope. That scope centers on financial statements. Neither an audit nor a QoE review replaces a proper assessment of technology, cyber exposure, contracts, or systems.
The technology section should clarify recurring costs, vendor dependence, software rights, technical debt, data quality, and security controls. It should also explain the investment needed to support the forecast and its consequences for deal structure.
Put technology costs through the same EBITDA tests
Adjusted EBITDA is more useful than reported net income in a deal. It makes an explicit claim about future financial performance. It is not automatically reliable. Every adjustment has to survive skepticism.
A quality of earnings analysis puts the bridge under scrutiny, not only the final number. Technology costs can distort the adjusted EBITDA bridge. They may be scattered across departments, capitalized, deferred, or hidden inside vendor invoices.
Test recurrence, evidence, and future run rate
Credible add-backs pass three tests. First, they were real P&L expenses that reduced reported income. Second, they reflect genuine non-recurring items, not capabilities the business still needs after closing. Third, documented EBITDA adjustments tie to invoices, contracts, payment records, and clear ownership.
A cloud migration may happen once. The cloud environment you must operate afterward is not. A one-time forensic investigation after an incident may qualify. Ongoing access controls, monitoring, backup testing, and security staff are normal costs of running the business.
Valuation multiples amplify small errors. If a buyer rejects $200,000 in adjustments at a 12x EBITDA multiple, indicated enterprise value falls by $2.4 million. That is not a minor accounting debate.
Watch commitments, discounts, and capitalized software
Temporary cloud credits, founder-negotiated discounts, free software pilots, and underpriced outsourced support can make current EBITDA look healthier than the post-close reality. So can software licenses that renew shortly after closing at a higher rate.
Capitalized development also deserves attention. Moving development cost to the balance sheet may change expense timing. It does not remove the cash cost of maintaining and improving the product.
A canceled platform needs more than a management promise. You need a termination notice, contract terms, replacement costs, timing, and a named owner. Without that evidence, the buyer may treat the spend as recurring.
Test whether systems can support forecast earnings
Systems don’t need to be new. They do need to support the volume, complexity, and service levels in your forecast.
A growing company can carry old technology for years. The issue appears when growth requires a rushed replacement, expensive specialist hiring, or a manual process that breaks under pressure.
Find costs hiding in the operating model
Start with a systems inventory. Identify every material application, integration, cloud account, data store, code repository, managed service, and critical vendor. Record its business purpose, annual cost, contract term, owner, dependencies, and renewal date.
Then look for technical debt. Unsupported software, undocumented interfaces, hard-coded pricing logic, weak release controls, and one-person knowledge create future costs even when today’s P&L looks clean.
Technical debt isn’t automatically an EBITDA adjustment. It can represent a future cash need, delay a growth plan, or threaten forecast profitability.
Follow the data that supports revenue and margin
Data quality affects billing, revenue recognition support, revenue quality, churn analysis, inventory, customer concentration, and working capital.
Duplicate customer records, manual overrides, inconsistent product codes, and unreconciled spreadsheets aren’t minor IT issues during a transaction. They can distort balance sheet analysis and obscure the operational picture.
A technology due diligence guide can help you examine the contracts, access controls, data flows, and systems behind financial results. The point isn’t a longer checklist. It’s knowing which gaps can change the deal.
Bring vendors, cyber risk, and AI into the deal picture
A business can depend on one cloud provider, one ERP partner, one managed service provider, or one payment platform without treating that dependency as a business risk. Buyers will.
Vendor concentration affects pricing leverage, outage exposure, data portability, and integration timing. Review assignment clauses, change-of-control consent, auto-renewal terms, audit rights, minimum-spend commitments, service levels, and offboarding rights. Together, these provisions can shape the deal structure and transaction terms.
Treat cybersecurity as a priced risk
Cybersecurity due diligence should test whether your security posture matches the risks you carry. Buyers will look for multifactor authentication, privileged-access controls, backup restoration testing, patching, logging, incident response readiness, and third-party risk management.
For public companies, the SEC requires disclosure of material cybersecurity incidents within four business days after a materiality determination. Its cybersecurity disclosure guide also covers risk management and governance expectations.
Private companies do not escape the business consequences. A ransomware event, exposed customer data, or weak cyber insurance terms can affect purchase price, indemnities, and board confidence. Stronger technology risk oversight gives leadership a clearer view before a buyer exposes the gap.
Put AI claims under the same discipline
If your forecast depends on AI, test the claim as you would any other earnings claim. Where is AI used? What data enters the tool? Who owns the output? What customer promises have been made? What happens when the model gets an answer wrong?
AI vendor review should cover privacy, confidentiality, intellectual-property rights, model output controls, human review, and contract liability. An AI acceptable use policy helps, but it does not replace evidence that the business can govern real use.
Tie findings to price, terms, and integration
Not every technology issue belongs in adjusted EBITDA. Each finding needs a clear financial and deal treatment, because EBITDA adjustments may differ from post-close cash requirements.
Give every finding one treatment
| Finding | Financial effect | Likely deal response |
|---|---|---|
| Understated cloud or support run rate | Lower adjusted EBITDA | Purchase price adjustment |
| Unpaid license true-up or firm vendor commitment | Debt-like cash need | Holdback, consent, or closing payment |
| Material security remediation | Post-close cost and risk | Escrow, indemnity, or funded remediation plan |
| Non-transferable systems or poor data | Integration cost and delay | Day-one plan and deal model |
Show each finding’s cash flow consequence, including its effect on operating cash flow. This makes required funding visible before the buyer sets terms.
The working capital target also needs care. Prepaid cloud credits, deferred technology invoices, implementation fees, and annual software renewals can distort balance sheet analysis and the view of normal working capital.
These choices should flow into the valuation model. They can affect enterprise value, business valuation, and the assumptions behind the deal model. The deal structure and transaction terms determine whether the response uses holdbacks, consents, escrow, or a funded remediation plan.
Current financial diligence guidance from Intralinks recognizes that technology integration is part of the wider deal picture. If identity systems, data, licenses, or core applications cannot move cleanly, the buyer needs to know before closing.
Prepare before the data room opens
Six to twelve months before an organized sale gives you time to fix obvious gaps, document costs, and separate normal operating spend from non-recurring items. If the transaction is already moving, don’t wait for perfect information. Keep preparing even after a letter of intent is signed. Build the cleanest evidence file you can now.
Create one evidence file for technology
Include a current systems inventory, vendor contracts, invoices, renewal dates, usage data, security assessments, incident history, software ownership records, and a 12-month technology roadmap.
For every material item, write down the cost, business purpose, accountable owner, risk, and next decision. Your CFO, operating leader, and technology lead should be able to tell the same story without contradicting each other.
Don’t claim savings you can’t trace. Don’t call a cost one-time when the business still needs the capability after close.
Close the technology leadership gap
A technology leadership gap shows up quickly when buyers test the business. Vendors answer for management. Cost ownership is blurry. Nobody can explain why a system exists or what it will take to replace it.
A fractional CTO can provide ongoing executive technology leadership when you need stronger ownership without a full-time hire. An interim CTO is often the better fit when the technology seat is open, trust has broken down, or the business needs immediate stabilization. Fractional CTO services can help you build the operating picture, technology strategy, and decision structure a buyer will test.
If technology facts are scattered or hard to defend, Prepare Technology for Diligence or Transition before the buyer names the problem for you.
The technology story must hold
An attractive EBITDA bridge is not enough. Buyers are purchasing the operating reality behind the numbers, including the systems, vendors, people, and controls required to sustain financial performance.
When the quality of earnings story matches the technology story, the seller has stronger support for business valuation and calmer leadership under pressure. Clear evidence beats a promise when the deal gets difficult.
Frequently asked questions
Is a quality of earnings review the same as a financial audit?
No. An audit focuses on how historical information is presented in financial statements. A quality of earnings review tests whether reported earnings and transaction adjustments reflect sustainable earnings for a transaction. Technology diligence tests whether the operating foundation can support that performance.
How can sell-side technology work support valuation?
It helps you defend the earnings story before the buyer finds gaps. Clear support for software costs, vendor exits, cloud commitments, data quality, security controls, and remediation plans reduces uncertainty. It also gives you time to fix issues that could otherwise lower the purchase price or complicate terms.
Are technology costs working capital or debt-like items?
They can be either, or neither. Prepaid software, deferred invoices, unpaid true-ups, contract minimums, and overdue remediation may affect the working capital target or behave like debt. The right treatment depends on the contract, timing, and who must pay after closing.
When should you start the technology review?
Start six to twelve months before a planned process when possible. That gives you time to document the facts, correct obvious weaknesses, and build a credible roadmap. If the deal is already active, begin with the material systems, vendors, costs, security risks, and ownership gaps.