Is this business's earnings quality deal-ready?
A practical Quality of Earnings checklist — balance-sheet verification, revenue quality, expense normalization, the working-capital peg, and the items that decide whether a deal closes on its headline number. Written for deal teams and founders, not just accountants. Every item is tagged Must have, Should have, or Good to have.
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- 90+ checks · 5 sections
- Must / Should / Good to have
- 12 earnings-quality red flags
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Everything a QoE tests, in the order that actually matters.
A Quality of Earnings review answers one question: is the EBITDA the seller is showing you real, recurring, and likely to continue under a new owner? Work the sections in order — balance-sheet verification anchors everything, because the balance sheet is what actually transfers at close.
Verify the balance sheet
Start here, always. Cash and a proof of cash, debt and interest recalculation, credit cards and merchant payouts, other assets and liabilities, and the off-balance-sheet exposure that hurts buyers most — each line reconciled to evidence outside the accounting system.
Revenue quality
Where deals are priced and where they break. Recognition and cut-off, customer and supplier concentration, seasonality and TTM distortion, and retention, churn and recurring-vs-one-time mix — all built from the invoice-level customer ledger, not summary P&L lines.
Expenses & EBITDA adjustments
Where adjusted EBITDA is made — and challenged. Completeness and classification, non-recurring add-backs that each need a document, owner and related-party normalization, and run-rate pro formas backed by actuals, not projections.
Then the accounts that drive the peg and post-close surprises — and the red flags that break the number.
AR, AP & the working-capital peg
Where earnings quality meets the peg. AR aging rolled forward with subsequent-cash testing, unrecorded-liability searches in AP, DSO and DPO trends, and a monthly net-working-capital schedule that respects seasonality — not a single favorable month.
Inventory & fixed assets
Slow-moving accounts where problems hide for years. Inventory tied to the count with obsolescence reserves, and a fixed-asset register that splits maintenance from growth capex — the maintenance capex that sits right below the EBITDA line in every buyer's model.
12 red flags + priority tags
Twelve earnings-quality warning signs — three or more and adjusted EBITDA should not be relied on. Every item is Must, Should, or Good to have, so you can triage: prove the Musts or the number is exposed; the Shoulds and Goods shorten the diligence cycle.
Every item asks one question: will this survive the buyer's QoE?
Each line is concrete and testable — not "review revenue" but "top 1, top 5 and top 10 customer shares computed for each of the last 3 years and TTM, with any single customer above 10% flagged and analyzed individually." You can genuinely tick it or you cannot.
The priority tags do the triage. Musts are non-negotiable — if they cannot be evidenced, adjusted EBITDA is not defensible and the deal is exposed. Shoulds remove diligence friction, price chips, and escrow demands. Goods signal a mature finance function and shorten the cycle.
Every dollar of EBITDA that fails diligence costs 4–8 dollars of price.
A Quality of Earnings analysis answers one question: is the EBITDA the seller is showing you real, recurring, and likely to continue under a new owner? The purchase price is usually a multiple of adjusted EBITDA — so every dollar of EBITDA that fails diligence costs the seller four to eight dollars of price, and every dollar of overstated EBITDA a buyer misses costs the buyer the same.
Every deal that re-trades or dies does so because reported earnings could not survive contact with the underlying data — the bank statements, the customer ledger, the payroll runs. For buyers, QoE validates that earnings are sustainable and quantifies a normalized working-capital peg before signing. For sellers, a sell-side run surfaces problems while they can still be fixed — and turns defensible add-backs into purchase price instead of arguments. For lenders, it confirms the cash flows servicing the debt actually exist and reconcile to the bank.
This checklist is the order of operations a QoE team uses to close that gap — the same standard behind a full engagement, laid out so you can run it yourself first and see exactly where the number stands.
Five sections, in order. Tick what can be evidenced.
The order matters. Balance-sheet verification anchors everything — it is what actually transfers at close, and if its balances do not tie to outside evidence, nothing downstream can be trusted. Run every test over the trailing 36 months, with the TTM as the headline period.
Verify the balance sheet first
Prove every asset exists and is worth its carrying value, and hunt every liability — recorded or not. Reconcile each line to a bank statement, a lender statement, a count, or a third-party confirmation. A balance sheet that does not reconcile means the P&L cannot be right either.
Interrogate revenue quality
From the invoice-level customer ledger, test recognition and cut-off, concentration, seasonality, and retention. Revenue that walks out the door with the seller — or that was pulled forward — is not the revenue a buyer is paying for.
Normalize the expenses and EBITDA
Every add-back needs a document and must be non-recurring, outside normal operations, and unlikely to continue under a buyer. Book negative adjustments — understated costs, owner roles performed for free — with the same honesty as add-backs.
Finish with the peg and the slow accounts — then score
Build the working-capital peg off a seasonally aware trailing average, and pressure-test inventory and maintenance capex. Then tally your tags: prove the Musts or the number is exposed; the Shoulds and Goods shorten diligence and hold the price.
Honest qualification. No fluff.
This checklist is for you if:
- You are selling in the next 6–12 months and want to fix the gaps before a buyer’s QoE team finds them first.
- You are buying and want to scope the QoE engagement — or pressure-test the CIM before spending on full diligence.
- You are a lender confirming the cash flows servicing the debt actually exist, recur, and reconcile to the bank.
- You are a founder or finance lead who wants to know, honestly, whether the headline EBITDA will hold up.
- You want a concrete, tickable self-assessment rather than a lecture on accounting theory.
- You run — or are looking at — a US business roughly $500K–$150M in revenue.
This is not for you if:
- You want a QoE report produced for you — that is a deal-advisory engagement, not a checklist.
- You need audited financial statements, which is an auditor’s engagement.
- You are years from any transaction and simply want cleaner monthly books — start with a bookkeeping cleanup instead.
- You want a formal valuation opinion rather than an earnings-quality review.
Worked through it and the number looks exposed? A focused Quality of Earnings review runs the balance-sheet verification, revenue-quality tests, and add-back analysis and tells you which adjustments will hold up — before the other side does. Book a call and we will scope it for your deal.
Questions about the checklist, answered honestly.
What format is the checklist?
Why start with the balance sheet?
What do the Must / Should / Good to have tags mean?
Is this for buyers or for sellers?
Do I need an accountant to use it?
Is it really free? Any catch?
What if the checklist shows the number is exposed?
Found gaps? A checklist tells you what is exposed. A QoE tells you what will hold.
Most deal teams and founders run this themselves first, then call us to run the analysis for real — the proof of cash, the concentration and retention work, the add-back review — and tell you which adjustments survive the other side’s scrutiny and which won’t, before it costs you price.
Founders from global advisory firms, supported by an in-house trained team of finance professionals. Big Four-grade depth with our own standards for accuracy and data security.