During due diligence, an analyst discovers that the target company's quality of earnings (QoE) report reveals $15 million in EBITDA adjustments, reducing reported EBITDA from $100 million to $85 million. The acquirer was planning to pay 10x EBITDA. What is the potential valuation impact of these adjustments?

Why C — $150 million reduction in enterprise value

The $15 million EBITDA reduction has a multiplicative effect on valuation when applied to the 10x multiple: $15M x 10x = $150M reduction in implied enterprise value (from $1,000M to $850M). This illustrates why quality of earnings analysis is critical in M&A due diligence. Even seemingly small adjustments to EBITDA can have enormous valuation consequences when multiples are applied. Common QoE adjustments include normalizing one-time items, correcting accounting irregularities, and adjusting for non-recurring revenue or expenses.