Quality of earnings for first-time searchers: scope, timing and preparation

Before hiring a quality of earnings provider, write down the financial questions that could change your acquisition decision. Bring the seller's earnings reconciliation, your current underwriting assumptions and the gaps you already know about. That gives the provider a concrete starting point for scoping the work.

For a first-time searcher, the challenge is knowing what the engagement covers and how to use its findings. A report is useful when you can trace an issue from the seller's records through the advisor's analysis to a decision about the deal.

Agree what the engagement will answer

Quality of earnings, or QoE, is part of financial due diligence. The work examines the financial story behind the proposed transaction. RSM describes financial diligence as including earnings quality, working capital, cash flow, revenue and margin analysis, and debt adjustments. The agreed scope determines which analyses your provider performs. RSM's financial due diligence overview describes these work areas.

Ask prospective providers to explain their scope in terms of your target business. A project-based contractor raises different questions from a subscription business or an inventory-heavy distributor. Give the provider the proposed transaction structure and the accounting information available so far.

Confirm the entities, historical periods and latest trading period to be covered. Ask which schedules and written findings you will receive, who leads the work, and how the team communicates a material issue before the final report. Agree the fee basis and the process for approving additional work.

Understand the limits before relying on the report

A QoE analysis and a financial statement audit are separate engagements. Do not assume that ordering one gives you the procedures or conclusions of the other. RSM's comparison of audits and QoE analysis explains that distinction and the differences in scope.

Ask the provider to state the limitations of your engagement. What will remain untested? Which conclusions depend on management explanations? What source records are unavailable? An unresolved issue needs to remain visible even when the report is complete.

Keep commercial diligence, legal review, tax work and operational assessment assigned to the appropriate specialists. A financial analysis does not promise that customers will renew or that you can replace the seller. It also does not approve your financing. Confirm the lender's requirements directly with the lender, including whether the proposed provider, scope and report will meet its needs.

If the seller supplies a QoE report, ask your advisor what additional work is needed for your decision. Confirm report access and reliance terms with the provider and relevant advisors rather than assuming that receiving a copy settles those questions.

Build the timeline around usable data

Ask the provider for an engagement-specific schedule. Separate appointment and kickoff from the point when the core records are available. A target report date is hard to assess without knowing what data the team needs to begin meaningful analysis.

Plan checkpoints for these steps:

Agree scope, responsibilities and the initial request list.
Confirm receipt of the core accounting records and identify gaps.
Review preliminary findings and questions with management.
Resolve material follow-ups and discuss the draft findings.
Receive the agreed deliverables and decide whether a later-period update is needed before closing.

Ask what could move each checkpoint. Missing monthly records, inconsistent exports or unresolved explanations need an owner and a response date. Tell the provider about your exclusivity deadline and lender review schedule before agreeing the work plan.

Avoid treating a generic number of weeks as a commitment. Ask for an estimated completion date based on the actual data received, then update the deal timetable when that assessment changes.

Prepare requests that the seller can fulfill

Start with the provider's list and agree one coordinated version. Use the broader search fund due diligence checklist to separate financial requests from legal, commercial and operational work.

For each request, specify the entity, date range, level of detail and file format. "Send financials" leaves too much room for interpretation. A request for monthly profit and loss statements and balance sheets for named periods tells the seller what to produce. Ask the provider whether native spreadsheet exports or transaction-level records are required before accepting summary PDFs as complete.

Discuss these possible inputs with the provider:

Monthly financial statements, trial balances and general ledger detail for the agreed periods.
Revenue detail by customer and product or service, with definitions for the fields supplied.
The seller's earnings adjustment schedule and supporting records for each adjustment.
Receivables, payables and inventory schedules at the dates the provider requests.
Payroll and owner-role information needed to investigate compensation adjustments.
Relevant accounting policies and explanations of changes between periods.

This is preparation for the engagement, not a universal list of required procedures. Let the provider tailor the requests. Identify who at the seller can export records and who can explain them. Track a received file separately from a request the advisor has reviewed and accepted.

Carry findings into the model without erasing their history

Synthetic example. The figures and findings below are invented to illustrate a review process.

A seller presents $900,000 of adjusted annual EBITDA. Its reconciliation includes a $100,000 payroll add-back. During diligence, the buyer and advisor identify $60,000 of ongoing replacement compensation associated with those duties, which was omitted from the seller's adjusted figure.

An illustrative buyer case starts at $840,000 after that correction, with all other assumptions held constant. Keep the original $900,000 claim, the adjustment explanation and the supporting evidence. Have the advisor confirm the treatment and whether related payroll costs require further changes.

Do not label the revised number as cash available for debt service or distributions. Review the model's other assumptions separately, including capital spending, working capital and financing. Ask the advisor to help distinguish an earnings adjustment from a balance-sheet or closing adjustment so you do not count the same issue twice.

Save the revised underwriting case and compare it with the earlier version. Record which finding changed which input. For an unresolved issue, use a clearly labeled sensitivity and identify what evidence would allow you to replace the assumption.

Close the loop on the decision

At the findings meeting, ask what changed, what remains uncertain and what additional work would resolve the material gaps. For each issue, record the next action and the person responsible. Some findings require more evidence. Others need discussion with the seller, lender or counsel before you decide whether to proceed.

SearchWare's deal memos help organize cited figures and open questions. Use the Diligence Portal to coordinate requests and shared documents, then revisit your acquisition underwriting when reviewed findings change the inputs. SearchWare supports this workflow; it does not perform QoE or replace the independent provider, lender or counsel.

Review plans and portal availability, then start a SearchWare trial with one deal's request list and underwriting questions.