Conducting Quality Of Earnings Analysis

Adjusts reported earnings for non-recurring items, accounting policy choices, and run-rate normalizations to derive a defensible adjusted EBITDA that buyers and lenders can underwrite.

When To Use

• Buy-side or sell-side due diligence requiring normalized earnings validation
• Evaluating a seller's CIM or management-prepared adjusted EBITDA
• Preparing or reviewing a QofE report for a letter of intent, financing package, or board presentation
• Assessing earnings sustainability when a target has lumpy revenue, owner-dependent operations, or recent acquisitions

Inputs To Gather

• Financial statements: 3 years of audited/reviewed P&L, balance sheet, and cash flow statements; trailing twelve months (TTM) interim financials
• Trial balance and general ledger detail: Monthly GL exports for the analysis period, with account-level detail sufficient to trace individual adjustments
• Management adjustments schedule: Seller's own pro forma or add-back schedule with supporting documentation
• Revenue detail: Customer-level revenue by month, contract backlog, and pipeline data
• Cost detail: Payroll registers, rent rolls, vendor invoices for material expense categories
• Tax returns: Corporate returns (or K-1s for pass-throughs) to cross-check reported income
• Related-party transaction list: All intercompany or owner-related transactions, compensation, leases, and service agreements