QUALITY OF EARNINGS & FINANCIAL DUE DILIGENCE

Independent Quality of Earnings & Financial Due Diligence for Private-Company Transactions

Business Valuation Advisors provides focused financial due diligence for buyers, lenders, investors, and business owners evaluating privately held company transactions. BVA analyzes the quality and sustainability of reported earnings, EBITDA and SDE adjustments, cash conversion, working capital, customer and revenue trends, balance-sheet items, and other financial issues that may affect valuation, financing, or transaction structure. The objective is to help clients understand the earnings and cash flow they are actually relying on—not simply the amounts reported in the financial statements.

  • Quality of Earnings, EBITDA & SDE Normalization
  • Proof of Cash, Revenue Quality & Cash Conversion
  • Working Capital, Customer Concentration & Transaction Risk

Schedule a Confidential Consultation

FINANCIAL DUE DILIGENCE ISSUES THAT MATTER
Reported Earnings Are Only the Starting Point

A Quality of Earnings analysis goes beyond reported net income, EBITDA, or SDE to evaluate the sustainability, quality, and cash-flow characteristics of the business. BVA analyzes the underlying accounting records, proposed adjustments, revenue and customer trends, cash conversion, working capital, and other financial drivers to identify issues that may affect valuation, financing, purchase-price negotiations, or transaction structure.

  • Reported EBITDA and SDE reconciled to normalized sustainable earnings
  • Owner compensation, discretionary expenses, nonrecurring items, and proposed add-backs
  • Revenue quality, customer concentration, recurring revenue, and trend analysis
  • Proof of Cash, cash conversion, and reconciliation to available bank activity
  • Normalized working capital, working-capital peg considerations, and operating liquidity
  • Balance-sheet risks, debt, capital expenditures, unusual transactions, and other diligence findings
From Reported Earnings to Sustainable Cash Flow

Reported net income, EBITDA, or SDE does not necessarily represent the earnings a buyer or lender can rely on after closing. BVA reconciles reported results to normalized earnings by evaluating owner compensation, discretionary and nonrecurring items, accounting classifications, related-party activity, and other proposed adjustments. The analysis then considers cash conversion, working-capital requirements, capital expenditures, debt obligations, and other recurring cash demands to help determine the sustainable financial performance underlying the transaction.

Preparing for Quality of Earnings? Start With the Free Readiness Toolkit

Organize the records and diligence items that may matter before Quality of Earnings, Cash Proof, valuation, or lender review begins. BVA’s free SBA Valuation & Quality of Earnings Readiness Toolkit includes a 14-page preparation guide and companion Readiness Tracker available in Excel and Google Sheets.
GET THE FREE QOE READINESS TOOLKIT
Frequently Asked Questions About Quality of Earnings & Financial Due Diligence
A Quality of Earnings analysis evaluates the sustainability, reliability, and cash-flow characteristics of a company’s reported earnings rather than simply accepting net income, EBITDA, or SDE at face value. BVA reconciles reported results to normalized earnings and may analyze proposed add-backs, accounting classifications, revenue trends, customer concentration, cash conversion, working capital, and other financial issues that may affect valuation, financing, or transaction structure.
The information required depends on the scope, but engagements commonly begin with historical financial statements, tax returns, current interim results, general-ledger detail, balance sheets, bank statements, debt schedules, customer and revenue information, working-capital accounts, and documentation supporting proposed earnings adjustments. BVA provides a focused document request once the transaction and diligence objectives are understood.
Proof of Cash compares recorded revenue and cash activity with bank deposits and other available financial records to help evaluate whether reported operating results are supported by actual cash collections. Depending on the scope, BVA may use Proof of Cash procedures to identify timing differences, unusual deposits, potential revenue-quality issues, or inconsistencies that warrant further diligence. It is a financial-analysis procedure and is not presented as an audit unless separately engaged for that scope.
BVA analyzes the operating working capital required to support the business and compares it with historical and current levels. Depending on the transaction, this may include accounts receivable, inventory, accounts payable, accrued operating liabilities, customer deposits, and other operating current accounts. The analysis can help identify a normalized working-capital requirement, support a working-capital peg, and highlight whether additional buyer funding may be needed after closing.
Yes. BVA reviews relevant balance-sheet accounts to identify items that may affect valuation, financing, purchase-price adjustments, or post-closing liquidity. Depending on the scope, this may include debt, accrued liabilities, customer deposits, related-party balances, unusual receivables, inventory, deferred revenue, tax obligations, non-operating assets or liabilities, and other accounts that warrant further investigation.
Yes. BVA can provide buy-side financial due diligence for buyers, lenders, and investors evaluating an acquisition, as well as sell-side Quality of Earnings and transaction-readiness analysis for business owners preparing for a sale. The scope is tailored to the intended user and may include normalized earnings, Proof of Cash, customer and revenue analysis, working capital, balance-sheet review, and identification of financial issues likely to arise during transaction diligence.
Yes. BVA can perform retrospective financial analysis using historical financial statements, tax returns, general-ledger detail, bank activity, customer information, and other records relevant to the selected period. The analysis distinguishes contemporaneous financial evidence from later information and can be useful in litigation, ownership disputes, transaction review, or other matters requiring reconstruction of historical earnings and cash flow.
Timing depends on the complexity of the business, quality and completeness of the accounting records, number of entities involved, availability of bank and customer data, and the depth of diligence requested. A focused small-business QoE may be completed more quickly than a multi-entity engagement requiring extensive Proof of Cash, working-capital, customer, and balance-sheet analysis. Once the scope and records are reviewed, BVA can provide a realistic timeline.
A business valuation estimates the value of a company or ownership interest using appropriate valuation approaches and methods. A Quality of Earnings analysis focuses more deeply on the financial performance underlying that value, including whether reported earnings are sustainable, how cash is generated, and whether adjustments are supportable. The two services are complementary and may be performed together when a transaction requires both an independent valuation and deeper financial due diligence.
BVA evaluates proposed add-backs based on the underlying facts and available documentation rather than accepting them automatically. The analysis may consider owner compensation, discretionary expenses, personal expenses, nonrecurring items, related-party transactions, unusual income or expenses, one-time professional fees, and other adjustments that may affect normalized EBITDA or SDE. Material adjustments are documented and assessed for whether they are reasonable, recurring, and supportable for the transaction.
BVA may analyze revenue by customer, product, service line, location, or other relevant category to identify concentration, recurring versus nonrecurring revenue, growth or decline trends, customer retention, unusual spikes, and other factors that may affect the sustainability of reported earnings. Significant customer concentration or changes in revenue mix can influence transaction risk, valuation assumptions, financing capacity, and purchase-price negotiations.
BVA evaluates how effectively reported earnings convert into operating cash flow by comparing earnings with changes in working capital, capital expenditures, debt obligations, and other recurring cash demands. Weak or inconsistent cash conversion can indicate that reported EBITDA or SDE overstates the economic benefit available to a buyer or lender and may warrant additional diligence into receivables, inventory, customer payment behavior, or accounting practices.
BVA considers whether historical capital expenditures are sufficient to maintain the company’s operating capacity and whether future replacement or growth-related investment may be required. Depending on the business, the analysis may compare depreciation, historical capital spending, equipment age, maintenance requirements, and expected reinvestment needs. This helps distinguish accounting earnings from the cash flow that may actually be available to a buyer or lender.
Yes. Quality of Earnings can help lenders and buyers evaluate the sustainability of the cash flow supporting a proposed acquisition. Depending on the financing structure and scope, BVA may analyze normalized EBITDA or SDE, Proof of Cash, working capital, debt-service capacity, customer concentration, capital expenditures, and other financial risks relevant to the lender’s underwriting and the economics of the transaction.
BVA performs Quality of Earnings and financial due diligence as analytical and consulting engagements rather than audits, reviews, or examinations of financial statements. The scope, procedures, information relied upon, assumptions, limitations, and findings are documented so the work can be understood by the intended users. When the engagement also includes a formal business valuation, the valuation component is developed under the professional standards applicable to that assignment.
The first step is a confidential consultation to discuss the business, transaction, financing structure, intended users, timing, and financial records currently available. BVA can then determine the appropriate diligence scope, identify the procedures most relevant to the transaction, and provide an engagement letter and focused document request covering the financial, bank, customer, working-capital, and other supporting information needed for the analysis.
Explore All Private Business Valuation Services
 

View BVA’s full range of private business valuation, transaction, tax, litigation, ownership, SBA, and financial diligence services.
Business Acquisition & SBA Valuation
 

Independent valuation for acquisitions, business sales, and SBA financing, including normalized earnings and transaction analysis.
Partner Buyout & Ownership Valuation
 

Valuation support for partner exits, shareholder redemptions, buy-sell agreements, ownership transfers, and disputes where normalized earnings and financial performance are important.
Tax, Estate & Gift Valuation
 

Independent valuation for estate and gift tax matters, ownership transfers, succession planning, and closely held interests.
Litigation, Disputes & Economic Damages
 

Independent valuation and financial analysis for shareholder disputes, divorce, lost profits, appraisal review, economic damages, and other contested matters.
Machinery, Equipment & Asset Valuation
 

Independent appraisal of machinery, vehicles, equipment, and other tangible assets when asset values affect transaction diligence, working capital, financing, purchase price, or deal structure.

Discuss Your Quality of Earnings & Financial Due Diligence

Whether you are evaluating an acquisition, preparing a business for sale, supporting SBA or other financing, or investigating the quality and sustainability of reported earnings, BVA can help determine the appropriate due-diligence scope and provide focused, independent financial analysis for the transaction.

Schedule a Confidential Consultation