What to Expect During a Quality of Earnings Engagement: The Process from Start to Finish

Buyers often commission a Quality of Earnings report without a clear picture of what the next ten to fifteen days actually involve. What documents will you need to gather? What does the analyst actually do with them? When will you hear back — and in what form? What does a good report look like versus a thin one?

Understanding the process helps you prepare more effectively, set expectations with the seller, and get the most out of the engagement. Here's exactly what happens at each stage of a well-run QoE engagement.

Stage 1: Engagement setup (Days 1–2)

The engagement begins when you sign an engagement letter and the QoE firm begins work. A good engagement letter specifies the fixed fee, the defined scope, the delivery timeline, what documents you need to provide, and the conditions under which scope might expand (and at what cost).

On day one, your analyst will send you a detailed document request list. This is the critical input to the entire engagement — and how quickly you collect and deliver these documents directly determines when the clock actually starts on the analysis.

What's typically on the document request list

• 3–5 years of business tax returns (federal, state, and any local returns)
• Internally prepared P&L statements for the same period, plus the trailing twelve months
• 12–24 months of business bank statements (all accounts)
• Most recent balance sheet
• Accounts receivable aging report
• Accounts payable aging report
• Payroll records for the current year and prior year (or equivalent)
• Seller's add-back schedule with any supporting documentation they've prepared
• Customer revenue listing (by customer, by year — anonymized is fine for initial review)
• Any existing financial model, forecast, or CIM from the broker

Stage 2: Document review and reconciliation (Days 3–6)

Once your analyst has received the financial documents, the first phase of analysis begins: reconciliation. The goal is to confirm that the financial statements presented in the broker package are consistent with the business's tax returns, bank statements, and other source documents.

This reconciliation step catches a surprisingly high number of issues. Revenue that appears on the P&L but isn't reflected in bank deposits. Expense categories that don't reconcile between the P&L and the tax return. Owner distributions that appear as business expenses. These discrepancies don't always indicate fraud — they often reflect accounting inconsistencies or classification differences that need to be understood and documented.

During this stage, your analyst will also map out the revenue by customer (to the extent the documents support it), calculate trailing twelve-month and year-over-year comparisons for revenue and gross margin, and identify the initial list of items requiring follow-up questions.

Stage 3: Add-back analysis (Days 5–8)

The add-back analysis is the core of the QoE engagement. Your analyst evaluates each item on the seller's claimed add-back schedule against the supporting documentation — payroll records, bank statements, vendor invoices, and tax filings.

For each add-back, the analyst is asking three questions:

1. Is it documented? Can the add-back be verified against a source document, or is it an unsupported assertion?
2. Is it genuinely non-recurring or owner-personal? Does the expense pattern across multiple years confirm this is truly one-time or personal — or does it recur under different descriptions?
3. Is the amount correct? The seller may claim a full expense as a personal add-back when only a portion is personal (vehicle used partly for business, travel that includes both personal and client-related trips).

Items that fail any of these tests get rejected, partially accepted, or flagged for additional documentation. The result is an independently supported adjusted EBITDA bridge — the same format as the seller's schedule, but with each line item verified against source documents.

Stage 4: Revenue quality and trend analysis (Days 6–9)

Parallel to the add-back analysis, your analyst is examining the revenue base in depth. This section of the QoE answers the questions that a P&L can't: Is this revenue sustainable? Who is it coming from? How concentrated is it? Is the business growing, flat, or in decline when you look at three to five years of context?

Key elements of the revenue quality analysis:

• Revenue by customer — identifying concentration, the top five to ten relationships, and any customers representing more than 15–20% of total revenue
• Revenue by type — separating recurring (contracts, retainers, subscriptions) from project-based or one-time revenue
• Multi-year trend analysis — year-over-year revenue and gross margin trends across three to five years, with context for any anomalous periods
• TTM analysis — comparing the trailing twelve months to prior full-year periods to identify whether recent performance is representative or exceptional
• Non-recurring revenue identification — any revenue in the measurement period that is unlikely to repeat under new ownership

Stage 5: Working capital analysis (Days 7–10)

Your analyst calculates monthly working capital for the trailing twelve to twenty-four months, establishing the historical pattern and identifying what "normal" looks like for this business. This analysis supports the working capital peg negotiation in your purchase agreement and flags any anomalies in the period immediately preceding the sale — the window when sellers are most likely to allow working capital to decline.

The working capital section also reviews the quality of receivables (aging, collectability, related-party balances) and, for product businesses, inventory adequacy and obsolescence risk.

Stage 6: Management questions (Days 5–10, ongoing)

Throughout the analysis, your QoE analyst will have questions — items they couldn't resolve from the documents alone, add-backs that need additional support, or revenue items that require explanation. These questions are typically collected and sent to the seller (through you, or directly with your authorization) in one or two rounds rather than piecemeal.

How the seller responds to management questions is itself informative. Sellers who provide clear, documented answers quickly signal well-organized financials and nothing to hide. Sellers who are evasive, slow to respond, or provide verbal explanations without documentation are creating findings of their own kind.

Stage 7: Draft report delivery and review (Days 10–12)

Before delivering the final report, most quality QoE providers deliver a draft for your review. This gives you the opportunity to ask clarifying questions, flag any items you believe were misunderstood, and ensure you understand every finding before it's finalized.

What the draft is not: an opportunity to ask the analyst to remove or soften findings you don't want the seller to see. The report reflects what the analysis found. Its value comes precisely from the fact that it can't be shaped by what the buyer wants it to say.

Stage 8: Final report delivery (Days 12–15)

The final report is delivered as a structured document — typically 20–50 pages depending on deal complexity — covering each major section of the analysis with supporting schedules.

What a strong QoE report includes

Red flags in a thin report

Not all QoE reports are equal. A report that simply restates the seller's add-back schedule with minimal independent verification, lacks multi-year revenue trend analysis, or contains no working capital section is not giving you the protection you're paying for. If your draft report is thin, ask your analyst directly: what documentation was reviewed for each add-back, and what was the basis for accepting or rejecting each one?

After the report: what happens next

The report lands in your inbox. Now you do three things: read the executive summary carefully, review the adjusted EBITDA bridge line by line, and identify which findings are material enough to bring to the seller.

Your QoE analyst should be available after delivery to walk you through the findings, answer questions, and help you understand the implications for deal structure and pricing. A good QoE engagement doesn't end at report delivery — it includes a conversation about what the findings mean for your next steps.

We covered what to do with findings in detail in Post 20 — price reduction, earnout, representations, or walk away. The QoE report gives you the ammunition. How you use it determines the outcome.