QUALITY OF EARNINGS (QOE) & FINANCIAL DUE DILIGENCE
Understand the Earnings Behind the Deal.
Whether you’re buying, selling, evaluating financing, or preparing for a transaction, we analyze the quality and sustainability of earnings, cash flow, working capital, financial adjustments, and key risks so you can make better-informed decisions.
TRANSACTION-FOCUSED FINANCIAL ANALYSIS
Know What the Numbers Really Mean Before You Make the Deal.
Reported earnings do not always tell the full story. A Quality of Earnings analysis goes beyond the income statement to evaluate recurring earnings, normalization adjustments, revenue and margin trends, working capital, cash conversion, balance-sheet risks, and other factors that can materially affect transaction value. Unlike a financial statement audit, QoE analysis is designed specifically to help buyers, sellers, lenders, and investors understand the economics of a transaction.
WHAT A QoE IS AND IS NOT
QoE, due diligence, valuation, and audit are four different things
| What it does | What it produces | |
|---|---|---|
| Quality of earnings | Analyzes whether reported earnings are sustainable and representative — normalizing adjustments, revenue recognition, customer concentration, non-recurring items, working capital | A QoE report for a buyer or seller |
| Financial due diligence | Broader review of the target’s financial position and risks, of which QoE is typically the core | A diligence report |
| Valuation | Estimates the value of a business or interest | A valuation report or calculation |
| Audit | An attest engagement providing an opinion on financial statements under auditing standards | An auditor’s report |
A quality of earnings analysis is not an audit. It is a non-attest advisory engagement performed for a specific transaction purpose, using procedures agreed with the client, and it provides no assurance on the financial statements. Need an audit, review, or other assurance engagement? We can help coordinate it. Corey Roder, CPA PLLC maintains referral relationships with independent CPA firms that provide these services. The assurance engagement is separately contracted with and performed by the independent CPA firm.
SCOPE OF ANALYSIS
What a QoE typically examines
- Normalizing and pro forma adjustments
- Revenue recognition and revenue quality
- Customer and supplier concentration
- Gross margin by product, service, or job
- Non-recurring and owner-related items
- Working capital and the normalized working capital target
- Net debt and debt-like items
- EBITDA bridge from reported to adjusted
WHO COMMISSIONS IT
Sell-side and buy-side
Sell-side. Commissioned by the seller or its advisor, usually before the business goes to market. The purpose is to establish how earnings will be presented and to identify the questions a buyer will raise, while there is still time to answer them. Findings that surface early are ordinary diligence items rather than late-stage surprises.
Buy-side. Commissioned by the buyer, typically after a letter of intent and during the diligence period. The purpose is to test whether the earnings presented are sustainable and representative, and to inform price, working capital targets, and deal terms.
Both examine the same underlying financial record. They differ in who is asking and what decision the answer supports.
CONTRACTORS
QoE for construction companies
For contractors, a QoE turns heavily on the quality of the work-in-progress schedule, the reliability of estimated cost to complete, profit fade history across completed jobs, backlog composition, and the treatment of unapproved change orders. Where job cost data will not support a defensible WIP schedule, that becomes a diligence issue in its own right.
WHERE TO START
Where to start
If a transaction is being contemplated on either side, a short conversation is usually enough to establish scope and timing. Start a conversation or call 469-452-7500.
Related: Mergers & Acquisitions · Construction · Fractional CFO