Due diligence
Quality of Earnings for a Small-Business Acquisition
What a quality-of-earnings review tests, how it differs from an audit, and when a buyer should commission one.
A practical research brief from the Business Buyer Check learning library.
What the Review Is Trying to Prove
- Revenue exists, belongs in the stated period, and can be traced
- Margins and operating costs are complete and sustainable
- Add-backs are documented and nonrecurring
- Working capital and cash conversion support continued operations
What It Is Not
A quality-of-earnings engagement is not automatically an audit, appraisal, legal review, or guarantee. Scope, procedures, reliance, and deliverables vary by provider.
When It Earns Its Fee
The value rises with purchase price, financial complexity, inconsistent books, aggressive add-backs, rapid growth, customer concentration, or limited buyer experience. A smaller deal may use a narrower accounting diligence scope rather than a full institutional-style report.
Questions to Ask the Provider
- Which source records will be reconciled?
- Will monthly trends and cohort or customer data be tested?
- How are net working capital and debt-like items handled?
- What limitations will remain after the work?
Frequently Asked Questions
How is quality of earnings different from an audit?
An audit opines on financial statements under a defined accounting framework. A quality-of-earnings review focuses on transaction questions such as sustainability, adjustments, cash conversion, and working capital.
Does every buyer need a quality-of-earnings report?
No. The appropriate scope depends on deal size, complexity, evidence quality, financing, and buyer risk tolerance.
Can a CPA review replace legal diligence?
No. Financial and legal diligence address different risks and should be coordinated rather than treated as substitutes.
This educational material is preliminary decision support, not legal, tax, accounting, lending, appraisal, or investment advice. Requirements and transaction terms vary; verify current rules with qualified advisers and official sources.
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