Quality of Earnings

A QoE is a transaction-purpose analysis of the sustainability and composition of earnings: it normalizes EBITDA, tests revenue quality, analyzes working capital, and identifies debt-like items, so that a buyer, lender, or investment committee can price and structure on economics rather than bookkeeping. It is not an audit: no opinion is issued, no GAAP-compliance assurance is given, materiality is deal-driven rather than statement-driven, and the procedures follow the deal’s risks rather than a standard’s checklist, which is precisely why a QoE routinely finds what audits are not designed to look for (an audit asks whether revenue is fairly stated; a QoE asks whether it will recur). The report’s users are specific, buyers, their lenders, and committees, and it is not intended for use beyond the deal. Understanding this scope is practical, not academic: it defines what reliance the SPA and the lender credit memo can place on it, and where audited financials, tax diligence, and legal diligence must carry the rest.

What we do: We scope the QoE to the deal's actual risks and define its reliance boundaries with the other workstreams.

The recurring taxonomy, each with its proof bar: owner and related-party normalization, above- or below-market compensation, personal expenses, family payroll, and related-party rents reset to market, evidenced by market data and the actual arrangements; true one-time items, litigation settlements, transaction costs, disaster events, proven non-recurring by nature and history, not by labeling; out-of-period and accounting corrections, cutoff errors, reserve true-ups, and policy changes restated into the periods they belong to; and pro forma and run-rate adjustments, the price increase taken mid-year, the exited unprofitable contract, the completed cost action, the most valuable and most abused category, credible only when the event has actually occurred and its full-period effect is computable from real data. The discipline we apply in both directions: every adjustment carries its evidence tier (contractual, transactional, or asserted), asserted adjustments get flagged as such rather than blended in, and the schedule presents management’s view and the diligence view side by side, because one indefensible addback undermines the credibility of every defensible one, and buyers use it to discount the whole schedule.

What we do: We deliver the adjustment schedule tiered by evidence, management's view and the diligence view side by side.

The analysis runs at the contract and customer level, not the trial balance: concentration and cohort behavior, revenue by customer across the periods, retention and expansion patterns, and a clear calculation of what losing the top three customers would do; recognition versus economics, how revenue is booked against how cash and obligations actually flow, with policy differences from the buyer’s framework quantified (deferred revenue, percentage-of-completion judgments, gross-versus-net presentation, the areas our ASC 606 practice covers); pull-forward and channel detection, quarter-end spikes, distributor loading, discounting patterns near period ends, the signs that future revenue was pulled into the current period; and pricing and mix decomposition, whether growth came from volume, price, or mix, because each recurs differently and prices differently. For recurring-revenue targets, the metric layer (ARR construction, NRR, churn definitions) gets rebuilt from contracts rather than accepted from the deck, since the deck’s definitions were written by the seller’s marketing. Revenue findings move deals more than cost findings, because they attack the multiple itself, beyond the number under it.

What we do: We rebuild revenue from contracts and customers, with the metrics reconstructed rather than accepted from the deck.

The analysis establishes what normalized net working capital actually is for this business: monthly NWC across the trailing periods with seasonality mapped, one-time distortions (the stretched payables before marketing, the inventory build for a launch) normalized out, and a peg proposed from the pattern, typically a trailing average matched to the business’s cycle, not a convenient single month. The definitional layer matters as much as the number: what is in and out of NWC (cash and cash-like items, debt-like items, income taxes, deferred revenue’s treatment) must align three documents, the QoE databook, the SPA definitions, and the closing statement mechanics, because every true-up dispute we have seen traces to an item that lived in one document’s definition and not another’s. Debt-like items get their own inventory, the unfunded, the accrued, the off-balance-sheet, feeding the enterprise-to-equity bridge on the hub’s net debt treatment. The deliverable is a peg the buyer can defend and a definitions exhibit counsel can draft from, which is how the true-up becomes arithmetic instead of a second negotiation.

What we do: We set the peg from the trailing pattern and deliver the definitions exhibit counsel can draft from.

The proof of cash reconciles reported revenue and expenses to actual bank activity: deposits mapped against recorded sales, disbursements against recorded costs, period by period, with the gaps identified and explained or quantified as findings. It is the single most powerful procedure on messy books because bank statements are not affected by accounting choices: they establish what actually happened regardless of what the ledger claims, they surface unrecorded activity in both directions (the revenue run through the owner’s other entity, the expenses paid personally), and they discipline the addback conversation, since a normalization that cannot be traced through cash is an assertion, not an adjustment. Around it sits the broader data integrity work: transaction-level detail tied to the trial balance, system-change bridges built where platforms switched mid-period, and, for carve-outs, the reconstruction problem, allocated costs and commingled cash, handled per the carve-out mechanics on the M&A hub. When a lender asks why they can rely on a QoE over unaudited books, the proof of cash is the answer.

What we do: We anchor messy books to the bank: the proof of cash, the system bridges, and the proven-versus-asserted map.

The translation map: adjusted EBITDA findings price directly, every accepted or rejected adjustment moves value at the multiple, and disputed adjustments become structure (an earnout tied to the contested run-rate, a holdback against the uncertain item) rather than a coin flip; revenue quality findings move the multiple itself or become specific reps and closing conditions (the customer contract renewed before close); working capital analysis becomes the peg and the definitions exhibit; and debt-like items move the enterprise-to-equity bridge dollar for dollar. The EBITDA definition itself flows into the SPA and, in leveraged deals, into the credit agreement, where it will govern covenants for years, a definition the covenant EBITDA discipline then has to manage. We deliver the report with this translation built in: a findings-to-terms schedule the deal team and counsel work from directly, and support through the SPA mechanics and the closing statement, because the diligence number only matters to the extent the documents enforce it.

What we do: We deliver the findings-to-terms schedule and support the number through the SPA and the closing statement.