Quality of Earnings Report: Prepare for Buyer Review

Agree What the Reviewer Is Being Asked to Establish

A quality-of-earnings review tests the earnings being presented for a transaction. BDO describes transaction quality of earnings as sustainable EBITDA after normalization adjustments to reported results. EBITDA means earnings before interest, taxes, depreciation and amortization; normalization means adjusting reported results to examine the continuing earnings position.

BDO also distinguishes that transaction work from the audit meaning of quality of earnings. Don’t assume an audit or a seller-prepared earnings summary answers the same engagement. Ask the adviser to define the work and its limits before agreeing the deliverable.

I’d settle the following questions with the reviewer and keep the answers with the engagement. They decide which records you gather and what the eventual report can answer.

Bring unanswered scope questions back to the adviser. Don’t quietly fill them in while preparing the files. If the reviewer asks for information outside the agreed scope, record the request and clarify the additional work before treating it as part of the original assignment.

Keep the Starting Records Stable While Questions Are Open

Give the reviewer an identifiable version of the financial information, with the period and accounting basis attached. Keep a record of the exports supplied and their relationship to the reported earnings figure. If finance corrects the books during the review, explain the correction and identify the replacement export.

For the hypothetical agreement, keep the recurring billing calculation beside the customer-level records. Ask the reviewer whether the question concerns the contracted rate, historical recognized revenue or a forward-looking assumption. Those labels should determine the answer you prepare; don’t let an annualized billing figure answer all of them.

My view is that the person coordinating the review should control the version list, even when different colleagues provide the records. Otherwise, a sensible correction can leave people discussing different totals. Give each response a reference to the information it uses.

Answer the Question Behind an Earnings Adjustment

A proposed adjustment is a suggested change to the reported starting figure, not an agreement with the buyer.

An earnings bridge is the reconciliation from that reported starting figure to the proposed adjusted result. Write the operation plainly: reported EBITDA plus supported increases, less supported reductions, equals proposed adjusted EBITDA. Keep an unresolved item outside the accepted total until its treatment is settled, or show a separate case that identifies the disputed assumption.

For this hypothetical agreement, $4,500 × 12 = $54,000 is an annualized billing rate. Before using it to explain an earnings change, supply the actual historical records and identify what is assumed to continue. The rate alone supplies neither a revenue adjustment nor the costs of delivering that work.

Ask the finance owner to identify whether the expense or income already appears elsewhere in the bridge. A label such as exceptional doesn’t do that work. If a proposal depends on work disappearing, show who will perform it afterward and what continuing cost remains.

Make the Response Log Part of the Review

Keep each reviewer question with the answer and its supporting record. Name the colleague responsible for responding, and identify the specific decision still open. A file being uploaded is a delivery event, not confirmation that the reviewer accepted the explanation.

If the buyer’s adviser disagrees with a proposed treatment, record the reason beside the amount. Ask your adviser which factual issue or assumption needs resolving. Don’t change the original supporting record to make the disagreement disappear; supply a clearly identified correction when the record itself was wrong.

For the billing example, a useful response could explain that the submitted figure is an annualized contract rate and provide the historical billing export separately. The reviewer can then ask for the relevant accounting reconciliation. That is a defined response, rather than a fresh spreadsheet with the same total and no explanation.

Decide Whether to Review Before the Buyer Does

MSP coach Brian Hoppe says owners commonly leave the examination of their books to the buyer’s accountants instead of arranging an earlier quality-of-earnings review. I’d make that timing choice explicit with your adviser. Ask what a seller-commissioned review would cover and which questions you want to resolve before buyer diligence begins.

BDO’s pre-sale guidance includes examining financial records and internal controls alongside succession readiness. It says a quality of earnings report can give a buyer limited assurance where the seller has only internal or compiled financials. That is a reason to discuss the appropriate work, not a promise that commissioning a report secures a price.

Keep the adviser’s fees and the work required from your team visible in that decision. Ask who needs to be available to explain the accounts, and whether the records can support the proposed engagement. An earlier report still needs a defined scope and usable underlying information.

Close the Review on an Explained Result

Before relying on the completed report, have your adviser walk through the bridge and the open points. Check that the report uses the agreed periods and identifies the assumptions behind the result. Ask how later information should be handled rather than silently extending a historical conclusion.

A rule of thumb about what buyers accept won’t resolve a question about your books. For the hypothetical agreement, the billing-rate calculation remains correct even if the reviewer rejects the proposed earnings treatment. Keep both conclusions visible, and decide the next response from the unresolved issue rather than the size of the number you hoped to present.