A Big-Four Quality of Earnings report can run eighty pages. Most buyers read four of them: the cover, the contents, the adjusted EBITDA number, and the page where the deal either lives or dies. The other seventy-six are not filler. They are the reasons that number is what it is. If you are about to wire millions on the strength of one figure, it is worth knowing how it gets built.
Here is what sits inside a serious QofE, piece by piece.
The adjusted EBITDA bridge
This is the spine of the whole report. It starts with the earnings the seller reported and walks, line by line, to a normalized number a new owner can actually expect to earn. Every step is an adjustment. Every adjustment is an argument you may have to defend across the table.
The earnings adjustments
Three kinds of items move the number, and each one needs evidence rather than a story:
- One-time and non-recurring. A lawsuit settlement, a PPP loan, a flood, one unusually large project that will not repeat.
- Owner and related-party. Above-market salary, the spouse on payroll, personal travel, rent paid to a building the owner happens to own.
- Pro-forma. The full-year effect of a price increase already in place, or a cost already cut.
Quality of revenue
Earnings are only as good as the revenue beneath them. We separate recurring from one-time, map customer concentration, and test whether growth is real or borrowed. A business that looks like a steady grower can be a flat business with one lucky year hiding inside it.
Net working capital
The least glamorous schedule in the report, and one of the most expensive to get wrong. We build the monthly trend and propose a target, the peg, so you are not handed a business stripped of the cash it needs to run on the morning after close.
Proof of cash
We tie the revenue and expenses on paper back to the money that actually moved through the bank.
Profit is an opinion. Cash is a fact. When the two disagree, that is where the real questions start.
Debt and debt-like items
The quiet ones. Accrued bonuses, deferred revenue, unpaid taxes, customer deposits, deferred maintenance. Obligations that should come off the price you pay, or that follow you home after the deal closes.
Quality of reporting
Can the business produce the numbers it claims, on time, the same way twice? We test the reporting itself, because a company that cannot reliably close its own books is telling you something before you ever ask a question.
The databook and the executive summary
Behind the narrative sits the databook, where every claim traces back to a source document. Up front sits the executive summary, the part decision-makers actually read, with the findings and risks that change how you negotiate.
The part the brand names leave out
None of this is secret, and none of it is proprietary to a firm with a tower downtown. The same bridge, the same proof of cash, the same working capital schedule get built whether an associate spends three hundred hours on them by hand or AI does the volume and a senior analyst spends thirty hours on judgment. The components do not change. The hours, the cost, and the bias do.
That gap is the entire idea behind how we work.