Understand what the report is intended to answer
A quality of earnings engagement examines questions relevant to a proposed transaction under a scope agreed with the financial advisor. Buyers often want to understand reported earnings, proposed adjustments, revenue quality and the relationship between profit and cash. The report is a tool for evaluating those matters, rather than a guarantee about future performance.
Begin by asking the advisor what the engagement includes and excludes. Tax diligence, legal review, commercial research and an audit are separate activities, even when their findings inform the same acquisition decision. A report can be detailed and still leave a question outside scope. The buyer needs to understand those limits before relying on the output in a lender discussion or investment memo.
The financial due diligence guide explains the broader financial workflow. Acquisitions supports document organization and AI red flag review. Its exported report is supporting material for the accountant, rather than a professional quality of earnings opinion.
Open with the perimeter and records reviewed
The opening section should identify the business activities, entities and periods covered. If the proposed transaction excludes part of the seller's operations, the report needs to explain how the financial information relates to what the buyer actually acquires. A consolidated income statement may require a reconciliation before it describes the target accurately.
Ask which records the reviewer receives and whether those records reconcile. Financial statements, ledger detail, customer schedules, receivables aging, payroll summaries and contracts can each support a different part of the analysis. Management explanations help interpret the records, but they do not automatically establish the figures or the proposed treatment.
Organize the package in a virtual data room. Label entity and period, separate forecasts from historical evidence and keep a clear explanation of gaps. Permissions per folder let you restrict sensitive records to the advisors who need them. A useful report makes the evidence boundary visible instead of implying that every part of the business is examined.
Explain how the financial statements are prepared
Before discussing adjusted earnings, understand the starting accounts. Ask whether they use cash or accrual accounting, which policies determine revenue and expense recognition, and whether those policies change during the reviewed periods. A comparison can be misleading when the basis changes without explanation.
The SEC guide to financial statements explains the different roles of the income statement, balance sheet and cash flow statement. Those public concepts help a buyer understand why a profit figure alone cannot describe liquidity or financial obligations. They do not prescribe a diligence scope for a private acquisition.
Ask the advisor how management schedules connect to the accounts. If the seller prepares a separate adjusted earnings schedule, identify the reconciliation to the original results. Keep the starting point intact so reviewers can understand what changes and why. A report that presents only an adjusted total makes that assessment harder.
Read the bridge rather than only the final total
An earnings bridge explains how the reviewer moves from reported results to the earnings measure under discussion. It should identify each adjustment, its rationale, the supporting records and any uncertainty. The buyer needs to distinguish an accounting correction from a commercial assumption about future ownership.
The following table is a structure for review questions. It does not state that an adjustment is acceptable or assign an amount.
| Potential item | Evidence to request | Question for the advisor |
|---|---|---|
| Owner compensation | Payroll records and role description | What cost remains when the work is replaced? |
| Unusual professional expense | Invoice and engagement scope | Is this exceptional or part of normal operations? |
| Related-party rent | Lease and payment history | What terms apply after the transaction? |
| Disputed customer balance | Aging, correspondence and collections | Does the recorded revenue require further assessment? |
| Promotional supplier benefit | Contract and invoices | What cost applies when the benefit ends? |
Avoid assuming every proposed exclusion improves the estimate. A business may need additional staff, maintenance or controls after closing. Ask whether unfavorable items receive the same attention as the seller's proposed add-backs. Check for double counting when an expense appears in more than one adjustment category.
Ask what supports the revenue pattern
Revenue quality includes the basis of recognition, concentration, recurring relationships and the conditions attached to sales. A customer schedule can help explain who generates revenue, but it should reconcile to reported results. Request clarification of credits, refunds, cancellations and changes near the end of a period.
IFRS 15 provides a public accounting framework for revenue from customer contracts. Whether that standard governs the target is a question for the accountant. Its concepts illustrate why billing, cash receipt and revenue recognition are distinct events that may occur at different times.
For a subscription business, examine whether management's recurring revenue metric includes nonrecurring fees, uncertain usage or customers who have already cancelled. For other businesses, delivery, acceptance and return rights may be more important. Ask the reviewer to connect the observed pattern to the accounting policy and the actual customer agreements.
Match financial assumptions with signed obligations
Contract terms can affect the interpretation of a revenue or cost schedule. A renewal expectation may depend on a customer decision, a supplier price may depend on minimum volume, and a license may require consent to transfer. These are reasons to connect financial and legal work rather than assuming a financial report addresses the legal consequences.
Use AI contract review software to identify potential provisions for counsel to examine. Keep signed agreements with amendments and schedules so the review is based on the complete package. A template alone cannot establish the terms agreed with a particular counterparty.
Have the accountant and counsel discuss material dependencies. Counsel interprets rights and obligations; the accountant assesses their financial relevance; the buyer considers commercial exposure. A report supports that discussion when it states the assumption clearly and identifies the underlying contract, rather than treating a financial estimate as independent of legal terms.
Examine what happens between profit and cash
Earnings and cash conversion answer different questions. Receivables may take time to collect, inventory may require funding and customer prepayments may create service obligations after closing. Ask how those items influence the cash available to operate the business and support financing.
Review receivables aging against subsequent collections and customer correspondence. Ask whether overdue balances are disputed, concentrated or unusually large relative to normal activity. Examine payables for delayed settlement or expenses that do not follow the usual cycle. The purpose is to understand the pattern and evidence, rather than apply an automatic conclusion to every aged balance.
Working capital and debt-like item treatment depend on the negotiated transaction definitions and professional advice. A report may inform those definitions without deciding them. Keep the schedules available to both financial and legal reviewers so proposed purchase price mechanics use the same understanding of the business.
Make uncertainty visible in the report
A useful report explains which questions remain open and why. The seller may be unable to produce a reconciliation, a relevant contract may be incomplete or the available history may not cover an important operating cycle. Those limitations affect how much confidence the buyer can place in a conclusion.
Distinguish a documented fact, a management representation and an assumption accepted for modeling. A management explanation can be credible and still require confirmation. A missing document can remain a material limitation even when the parties want to move quickly. The report should help the buyer see that distinction without implying that an unanswered question is resolved.
Use the M&A due diligence process to connect open financial findings with other workstreams. An issue might call for more evidence, an amended assumption, a specialist opinion or a negotiated protection. Your advisors help assess which response fits the transaction.
Prepare the room and export supporting findings
Upload the target's records into Acquisitions, organize them by workstream and set permissions per folder. External sellers, lawyers and accountants invited for view and upload only do not need a paid seat. AI review highlights potential issues across financials and contracts for the team to investigate.
Team and Fund include Q&A and custom checklists. Ask focused questions that identify the reconciliation or document needed. Your advisor decides whether the response addresses the issue. Export the red flag report and review it before sharing with the investment team. Identify its document coverage and use it alongside the professional report, rather than labeling automated output as the accountant's opinion.
Pricing states the room, seat, storage and analysis allowances. Analyses count per billing period and deleting documents does not restore used analyses. The one-time demo illustrates the report format before you choose a subscription.
FAQ
No. It is a guide to report structure and review questions. It contains no invented target, deal or financial results.
No. Historical analysis supports assumptions but does not establish future customer behavior, costs or operating performance.
Ask your accountant to assess the evidence, recurrence and cost under your ownership. A familiar label does not establish that the adjustment is appropriate.
Prepare for the earnings conversation
Analyze a document and inspect the demo findings, then create your account to organize the records behind the review.
