What a buyer’s quality of earnings review actually checks

LIMESTONE Strategic Partners prepares quality of earnings reviews for owners preparing to sell and for buyers of businesses earning $500K to $5M of EBITDA, with a CPA and an operator on every review.

A buyer’s quality of earnings review answers four questions: are the earnings provable, does the revenue repeat, do the bank statements match the books, and how much working capital does the business need to run. We work up from the tax return to reported earnings, to adjusted earnings, to the bank, and we show the add-backs we rejected beside the ones we accepted.

A buyer-ordered Quality of Earnings review asks four things: are the earnings provable, does the revenue repeat, do the bank statements match the books, and how much working capital the business needs to run. About a third of banker-led sale engagements never close, Pepperdine’s 2026 Private Capital Markets Report found, and the gap between the buyer’s price and the seller’s is the reason cited most often.

There are two numbers in every sale of a business. The earnings you report, and the earnings that survive a buyer’s review. Most selling owners never learn the gap between them until a buyer is sitting across the table, which is about the worst possible time to find out.

A quick story first, because it’s the reason I wanted to get into deals. Years ago, I watched my dad sell the business he spent decades building alongside my mom. It did not go badly; he ended up with a good team at his side and ultimately a positive exit. But the years around that sale were some of the hardest of his life, because he carried much of it alone at the beginning, particularly the planning in the years ahead of his exit. I didn’t know it then, but those late nights he spent crunching numbers are why I do this work.

I’ve spent my whole career analyzing financial statements, and it’s still the part of the job I enjoy most. Done right, they tell a story: where the business has been, where it is now, and if you read closely, where it’s going. The catch is that the statements almost never give up the whole story on their face. You have to dig. I did that digging on both the buyer’s and the seller’s side of deals for years, more than one hundred quality of earnings reviews, before I stepped away from transaction work to feed professional curiosity. The deals drew me back. So did the chance to get owners ready for the biggest transaction of their lives. Nothing in finance moves like a deal, and nothing tests the story financial statements tell like a buyer and a bank writing a check. I’m here to break down that story, whichever side of the table you’re on.

One thing all those reviews taught me: a buyer reads your financials to decide whether the earnings will hold. The review’s job is to show, document by document, which earnings are real.

When a serious buyer takes interest in a target company, they order what’s called a quality of earnings review, the same review I spent years running. It’s a buyer’s-eye look at your books, and it answers whether your earnings are real, in four parts. The price at LOI is set on what you claim as earnings. What you actually walk away with is determined by what survives the quality of earnings review. Owners often lose money in the gap.

A buyer checks four things, and all of them can be fixed if you start early.

1. Your real, provable earnings

Your tax return is built to show as little profit as possible. But you want to illustrate the opposite come time to sell. So the first job is adding back the costs that won’t follow you out the door: the above-market salary you pay yourself, personal expenses run through the business, a one-time legal bill, rent you pay yourself above what the building is worth. Every business has a few. Buyers have seen them all. Those add-backs are real money on the price. But only if you can prove them. Every one needs a document, a reason, and a number you can defend; the add-backs article goes deep on all three. A dollar you add back without proof comes straight out of the price when the buyer pushes. And it cuts both ways: if you underpay yourself, a buyer charges a market salary for your replacement against the earnings, and your profit drops, because someone has to do your job after you’re gone.

2. Whether the revenue is real and repeatable

A buyer separates the sales that come back every year from the revenue that only happened once. Recurring is more valuable. They also take a hard look at customer concentration. If sales from one or two customers are too big of a share, that’s risk, and added risk discovered during diligence typically knocks down the price.

3. Bank statements that match the books

Earnings on the books and cash in the bank are not always the same thing. The revenue you reported should match the deposits in your bank, and the cash you spent should match the expenses on the income statement. If they don’t match, we’ll need a clean reconciliation to provide a buyer comfort that the bank statement is telling the same story as the financial statement.

4. The working capital the business runs on

Every business needs everyday operating cash to run: what customers owe you, the inventory on the shelf, less the bills you owe your vendors. In a deal that’s called working capital, and a buyer expects it to come with the business the way a house comes with the furnace. So we analyze how much the business has actually needed, month by month, across the trailing year.

Let’s say you tell the market your earnings are $2.5M. The review then trims it to $2.2M, because a few add-backs weren’t documented or supported and some costs were actually recurring. At a common multiple for a business of this size, say six or seven times, that $300,000 turns into a swing of nearly $2.0M in price. The only thing that moved was the earnings you could prove.

And this isn’t rare. About a third of banker-led sale engagements never close, and a gap between what the buyer will pay and what the seller expects is the reason cited most often. A clean review still leaves questions it was never built to answer, and my partner Jared wrote up that gap: what a quality of earnings report won’t tell you.

Now the good news. You can prepare for the buyer’s diligence. The owners who aren’t surprised during the buyer’s due diligence are the ones who had an honest read a year or two before they needed it. They built the case for their profit before a buyer ever asked and cleaned up the messy stuff while they still had time. Deals with fewer discoveries during diligence are more likely to close on time, limiting the seller’s deal fatigue.

Whether you sell in two years or ten, clean numbers make the business stronger right now and worth more when you decide it’s time.

If you’re a year or two from selling, the move is simple: see your numbers the way a buyer will, before a buyer does. That’s a sell-side quality of earnings run early, a fixed-fee look, 10 to 25 business days depending on scope, that hands you the punch list while you still have time to fix it. What one costs, and what drives the fee, is here: what a quality of earnings report costs.

Buying a business? Similar review but on your side of the table: a fixed-fee, buy-side quality of earnings on lower-middle-market deals, with partner-led work and clearly defined scopes. I lead the financial testing, and Jared reads the operating risks visible in the information agreed for the engagement. Operational fieldwork beyond that, such as calls with customers, is scoped on its own.

From 1 October 2026, an SBA lender has to have a quality of earnings on a 7(a) initial acquisition or business expansion at a business purchase price of $3 million or more: its own, or the buyer’s if the lender elects to have one of its approved vendors review it. That changes who orders it: who orders the QoE on an SBA deal. Brokers, CPAs and lenders: if a client is heading into a sale or an SBA loan, a thirty-minute call will tell them which review fits.

Ryan Anoskey is a CPA and a partner at LIMESTONE Strategic Partners. He has run more than 100 quality of earnings engagements over his career, buy-side and sell-side, across manufacturing, healthcare, contracting and multi-site roll-ups, including work before joining LIMESTONE.

Sources: Pepperdine Private Capital Markets Report 2026 (Pepperdine Graziadio Business School), investment banker survey, page 58: 43 respondents; a median 32 percent of engagements did not close, the valuation gap was the most cited cause, and the most common pricing gap on a failed sale was 11 to 20 percent.