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Quality of Earnings Reports
CPA-led quality of earnings reviews for buyers, sellers and lenders: adjusted EBITDA, proof of cash, working capital and revenue analysis.
A quality of earnings report answers the question every buyer and lender asks: are these earnings real, and will they continue? NexusWorks prepares quality of earnings reviews for buyers, sellers and lenders in lower middle market deals, with a clear bridge from reported profit to adjusted EBITDA.
What a quality of earnings review covers
- Adjusted EBITDA: owner compensation, one-time costs, related party items and accounting errors, each adjustment explained and supported.
- Proof of cash: matching reported revenue and expenses to bank activity, which is often where problems in smaller companies first appear.
- Revenue quality: customer concentration, recurring versus one-time revenue, and trends by month, product and customer.
- Net working capital: a normalized working capital level to support the peg in the purchase agreement.
- Debt and debt-like items: deferred revenue, accrued bonuses, unpaid taxes and other items that may reduce the price.
- Tax exposure: sales tax, payroll and income tax issues a buyer should know about before closing.
Buy side and sell side
A buy-side review helps a buyer confirm what they are paying for before they sign. A sell-side review lets an owner find and fix issues before buyers find them, which usually means fewer price renegotiations and a faster process. Lenders financing acquisitions often ask for one as well.
How it differs from an audit
A quality of earnings review is not an audit and does not give an opinion on the financial statements. It is a focused analysis of earnings and working capital for a specific transaction. If the deal or the lender requires audited or reviewed financial statements, see our assurance services.
Timing and cost
Quality of earnings reports for lower middle market companies range widely, from about $5,000 to $100,000 or more depending on size and complexity. For a company under $10 million in revenue with reasonably simple books, a standard sell-side report typically falls between $10,000 and $20,000. Our fee is fixed and quoted after a short scoping call, based on revenue, number of entities and the period covered.
Most reviews for smaller businesses take three to six weeks once data is received, depending on the condition of the books.
Quality of earnings work sits within our professional and financial services work and our verification and due diligence engagements. Sponsors also use it alongside our private equity fund support. Book a scoping call to discuss your deal.