The short answer
A quality of earnings review is an independent accounting analysis, commissioned by a buyer, testing whether a practice’s reported earnings are accurate, sustainable and correctly stated. It is not an audit. In a concierge or direct primary care practice it examines each add-back individually and recalculates membership retention from source records rather than accepting the seller’s figure.
Quick answers
Is a quality of earnings review the same as an audit? No — an audit tests whether financial statements comply with accounting standards, while a quality of earnings review tests whether the earnings presented in a deal are real and repeatable.
Who pays for it? The buyer commissions and pays for it, though a seller can commission their own before going to market.
When in the process does it happen? After the letter of intent is signed, during the exclusivity period — which is precisely when a seller has the least leverage.
What does it look at in a membership practice? Add-backs, member-level revenue against bank deposits, retention recalculated by cohort, related-party arrangements, and fees collected in advance.
Can it change the agreed price? Yes — a quality of earnings review finding that reduces adjusted earnings reduces the price by that amount multiplied by the agreed multiple.
What is a sell-side QoE? The same analysis commissioned by the seller before buyers are approached, so that problems are found privately rather than during exclusivity.
How long does one take? Longer where records are disorganised, because most of the elapsed time is spent waiting for documents rather than analysing them.
Key takeaways
- A quality of earnings review tests whether reported earnings are real and repeatable, which is a different question from whether the accounts are correct.
- In a concierge or DPC practice, the membership retention analysis is the part that most often changes the price.
- A QoE recalculates retention by cohort, which reveals deterioration that a single blended retention figure conceals.
- Because the review happens during exclusivity, a seller responding to its findings is negotiating from the weakest position in the entire process.
- A seller can commission the same analysis before approaching buyers, which converts every finding from a negotiation into a correction.
Where this sits, and why it matters so much
The quality of earnings review arrives at stage five of six in the concierge practice sale process, after the letter of intent has been signed. That timing is the whole reason it carries so much weight.
Before signing an LOI, a seller has competing interest and can walk. After signing, they have granted exclusivity, told other buyers to stand down, and started a clock. The QoE lands in that window. If it produces a finding, the seller’s realistic options are to accept the consequence or restart a process that has already consumed months.
Nothing about that is improper — a buyer is entitled to verify what they are buying, and they will not spend money on the analysis without exclusivity. But a physician-owner should understand the sequence before they are inside it, because it explains why preparation matters more than negotiation.
What a quality of earnings review is, and what it is not
Quality of earnings review (QoE) An independent accounting analysis testing whether reported earnings are accurate, sustainable and correctly stated. Commissioned for a transaction, not for statutory purposes. Audit An examination of whether financial statements are prepared in accordance with applicable accounting standards, and whether they are materially free of error.
The distinction matters and is regularly misunderstood. An audit asks whether the accounts are right. A QoE asks whether the earnings are repeatable — whether the number a buyer is paying a multiple of will still be there next year under different ownership.
A practice can have entirely accurate accounts and a poor quality of earnings: revenue concentrated in relationships that will not transfer, one-off items presented as ongoing, or costs postponed rather than avoided. The accounts are correct. The earnings are not durable. Those are separate findings, and only the second one moves the price.
What the review examines in a concierge or DPC practice
Six areas, in roughly the order they cause problems.
1 · Each add-back, individually
Every adjustment in the seller’s schedule is tested against source records. Not sampled — tested. An adjustment that cannot be documented is removed, and because a multiple is applied to the resulting figure, the price falls by more than the adjustment was worth. The mechanics are set out in our guide to adjusted EBITDA and add-backs.
2 · Member-level revenue against bank deposits
The reviewer reconciles what the membership roster says was billed against what actually arrived in the accounts. Gaps here are usually administrative rather than sinister — members on payment plans, unrecorded discounts, fees waived informally and never documented — but each gap reduces the revenue base and each one invites the next question.
3 · Retention, recalculated by cohort
The most consequential analysis in a membership practice, and the one owners are least prepared for. It gets its own section below.
4 · Related-party arrangements
Rent paid to an entity the physician owns, family members on payroll, service arrangements with connected businesses. These are normalised to market, and the normalisation frequently runs against the seller.
5 · Revenue recognition on fees paid in advance
An annual membership fee collected in January is not revenue in January. It is an obligation to deliver care for eleven more months. Where the accounts do not distinguish cash received from revenue earned, the quality of earnings review will restate it — and the restated figure is lower in a growing practice.
6 · Deferred revenue as a closing liability
Related to the above and more concrete. The unearned portion of fees already collected is money the buyer must fund, because they will deliver the care without receiving the payment. Buyers treat it as a liability to be settled at closing, which reduces net proceeds. Sellers who have never modelled this are surprised by it late.
The retention analysis, and why cohorts change the picture
Most practices report retention as a single blended figure — the proportion of members who renewed across the whole panel. A QoE will not accept that. It rebuilds retention by cohort: members grouped by the year they joined, then tracked forward.
The two views can tell completely different stories about the same practice.
Worked example
The same practice, viewed two ways.
| Illustrative only — not transaction guidance. All figures invented to demonstrate the method. They are not benchmarks, not typical retention rates, and not drawn from any transaction. Joining cohort | Members joined | Still members after 12 months | Retention |
|---|---|---|---|
| 2021 | 150 | 144 | 96.0% |
| 2022 | 90 | 86 | 95.6% |
| 2023 | 70 | 64 | 91.4% |
| 2024 | 55 | 47 | 85.5% |
| 2025 | 35 | 29 | 82.9% |
| All cohorts blended | 400 | 370 | 92.5% |
The blended figure is 92.5%, which most owners would report without hesitation and most buyers would find acceptable. The cohort view shows first-year retention falling from 96% to 83% across five years. A buyer reading the second table concludes that recent growth is not durable and that the blended number is being held up by long-tenured members — who will eventually leave. Same practice, same members, very different conversation.
This is why the analysis matters more in membership medicine than in most sectors. A blended retention figure is not dishonest. It is simply not the question a buyer is asking, and an owner who has only ever looked at the blended figure has not yet seen their own practice the way it will be assessed.
It is also entirely possible to run this analysis yourself, today, from your own records — which is the most useful sentence in this article.
What causes findings, and what happens next
Findings fall into three groups, and they have different consequences.
Documentation gaps. The underlying position is fine but cannot be evidenced. Usually fixable during the review if the seller can produce records quickly, which is a function of preparation rather than good fortune.
Genuine restatements. Adjusted earnings are lower than presented. The price moves, typically by the restatement multiplied by the agreed multiple. This is the finding sellers fear, and it is the one preparation prevents.
Credibility events. The most damaging category and the least discussed. An undisclosed related-party arrangement, a materially different real churn rate, or a set of add-backs that do not survive contact with the ledger. The specific finding may be small. The consequence is that the buyer re-examines everything else the seller has said, diligence widens, and the deal slows while trust is rebuilt — if it is.
The third category is the argument for disclosure. A problem the seller raises is a problem being managed. The same problem discovered by the reviewer is a question about the seller.
The counter-move: commissioning your own
A seller can commission the same analysis before approaching any buyer. It is usually called a sell-side quality of earnings review, and it is standard practice in larger transactions while remaining uncommon among individual medical practices — which is precisely why it is worth knowing about.
What it changes is not the findings. The same issues exist either way. What changes is when they surface, and therefore what they cost.
| The same finding, discovered at two different points in the process. | Found in buyer’s QoE | Found in your own, first |
|---|---|---|
| When | During exclusivity | Before buyers are approached |
| Your leverage | Lowest of the whole process | Full — nothing is committed |
| The conversation | A negotiation you did not choose | A correction, in private |
| Time available | Days, inside a running clock | Months, or as long as you need |
| Effect on trust | Every other figure re-examined | None — nobody else has seen it |
| Cost | Paid by the buyer, charged to you in price | Paid by you, in fees |
The honest counterweight: a sell-side review costs real money at a point when there is no transaction to pay for it, and it may surface problems the owner would rather not know about. Some owners reasonably decide the expense is not warranted for a smaller practice.
But the decision should be made deliberately, with the trade-off understood — not by default, because nobody mentioned the option existed.
How to prepare for a quality of earnings review
Everything below is achievable before a buyer exists, and all of it is easier now than later.
- Run the cohort retention analysis yourself. Members grouped by joining year, tracked forward. If the numbers surprise you, that is the point of doing it early.
- Document each add-back as the cost is incurred , rather than reconstructing the schedule from bank statements years later.
- Reconcile membership billing to deposits for the last three years, and find out why any gaps exist.
- List every related-party arrangement and have it reviewed. Rent, payroll, service agreements. Disclose them early rather than being asked.
- Separate cash received from revenue earned in the accounts, so deferred revenue is visible rather than discovered.
- Keep the records a reviewer will ask for in one place. Much of a quality of earnings review’s elapsed time is spent waiting for documents, and a slow response reads as disorganisation whether or not it is.
Frequently asked questions
What is a quality of earnings review?
A quality of earnings review is an independent accounting analysis commissioned for a transaction, testing whether reported earnings are accurate, sustainable and correctly stated. In a concierge or DPC practice it examines add-backs individually and recalculates membership retention from source records.
How is a quality of earnings review different from an audit?
An audit tests whether financial statements comply with accounting standards and are materially free of error. A quality of earnings review tests whether the earnings are repeatable under new ownership. A practice can have accurate accounts and still have a poor quality of earnings.
Who pays for a quality of earnings review?
The buyer commissions and pays for it, usually after the letter of intent is signed. A seller may also commission their own review before approaching buyers, which is known as a sell-side quality of earnings review.
What does a quality of earnings review examine in a membership practice?
Each add-back individually, member-level revenue reconciled against bank deposits, retention recalculated by joining cohort, related-party arrangements normalised to market, revenue recognition on fees collected in advance, and deferred revenue treated as a liability to be funded at closing.
Why do buyers recalculate retention by cohort?
Because a single blended retention figure can conceal deterioration. Grouping members by joining year and tracking each group forward shows whether recent cohorts are leaving faster than older ones, which indicates whether recent growth is durable.
Can a quality of earnings review reduce the agreed price?
Yes. Where the review restates adjusted earnings downward, the price typically falls by the restatement multiplied by the agreed multiple. Because the review takes place during exclusivity, a seller responding to it is negotiating from the weakest position in the process.
Should a seller commission their own QoE first?
It converts findings from negotiations into corrections, because problems surface privately while the seller still has full leverage and unlimited time. The counterweight is that it costs money before any transaction exists, and some owners of smaller practices reasonably decide it is not warranted.
A six-week preparation checklist
Owners rarely fail a quality of earnings review because the practice is weak. They fail because the evidence is scattered across systems that were never designed to be audited. The checklist below is the sequence most advisers use in the weeks before diligence opens, and it removes the majority of findings before anyone external sees the file.
- Week one — reconcile revenue to the bank. Every month of membership income should tie to deposits. A quality of earnings review begins here, and any gap becomes the first question asked.
- Week two — rebuild retention by cohort. Aggregate churn hides the problem. Cohort tables are the only form a quality of earnings review will accept without argument.
- Week three — document each add-back. One line, one explanation, one supporting document. Adjustments without paper are removed rather than debated.
- Week four — normalise related-party items. Rent paid to an entity you own, family members on payroll, and vehicles run through the practice are all restated to market.
- Week five — fix revenue recognition. Annual memberships collected in advance are earned monthly, and the unearned balance is a liability at closing.
- Week six — assemble the data room. Three years of statements, tax returns, the member roster, agreements and the add-back schedule, indexed and consistent.
Done properly, this work converts a quality of earnings review from an interrogation into a confirmation. The number in the letter of intent survives, the timetable holds, and the owner spends diligence answering questions rather than reconstructing history.
Related reading
A quality of earnings review tests the numbers that valuation and negotiation depend on.
- What is adjusted EBITDA in a medical practice sale?
- What is a concierge medical practice worth?
- How to sell a concierge medicine practice: the full process
- Who buys concierge medical practices — and what each one wants
