An engagement waits on the company more often than the company waits on us. Almost every timeline problem in a Quality of Earnings engagement traces back to documents arriving in pieces over three weeks instead of in one batch in the first few days.
Below is what gets requested and why. If you are a seller preparing to go to market, or a buyer about to be under LOI, working through this list in advance is the highest-return hour you will spend on the process.
Financial statements and books
- Profit and loss statements, monthly, for the last three full years and year to date. Monthly matters. Annual figures hide seasonality and hide the month where something unusual happened.
- Balance sheets, monthly, for the same periods. Even on cash-basis books. The balance sheet is where inventory movement, deferred revenue and receivable trends show up, and those are what separate real margin change from timing.
- General ledger detail for the same periods, in Excel or a format that exports cleanly. A PDF of a general ledger is technically a general ledger and practically a week of retyping.
- Trial balances at each year end.
- A backup of the accounting file where the system allows it. This is usually faster for everyone than exporting reports one at a time.
Tax and government filings
- Filed business tax returns for the last three years, including all schedules.
- IRS transcripts, or authorization to obtain them. Reconciling to transcript data rather than to a copy of a return is a meaningfully stronger procedure and it is becoming standard.
- Payroll tax filings, quarterly, for the same periods.
- Sales tax returns where applicable.
Banking
- Bank statements for every operating account, monthly, for the full period under review. All accounts, not just the main one.
- Merchant processor statements if a meaningful share of revenue comes through card processing.
- Loan statements and amortization schedules for anything on the balance sheet.
Bank statements are the single most important item on this list. Proof of cash, tying reported revenue to money that actually arrived, is the procedure that catches the most and the one that cannot be done from the books alone.
Revenue detail
- Revenue by customer by year, for at least the top twenty customers. This is what customer concentration analysis runs on.
- Revenue by product or service line where the business has more than one.
- Accounts receivable aging at each year end and current.
- Contracts or recurring revenue schedules, with terms and renewal dates.
- Work in progress schedule for construction, services and anything billed on completion.
Costs and payroll
- Payroll register by employee, showing compensation by year, with owner and family compensation identified.
- Accounts payable aging at each year end and current.
- Inventory balances at each year end, and the method used to value them. If the books are cash basis, a supplemental schedule of actual counts is enough and is far better than nothing.
- Lease agreements, with related-party leases flagged.
- Detail supporting every add-back in the CIM. Not the schedule of add-backs. The invoices, statements and payroll records behind them.
Context
- The CIM or offering memorandum, and the seller's recast.
- Organizational chart, and a list of all related entities with the transactions between them.
- The LOI or purchase agreement draft, so working capital treatment can be assessed against what is actually being negotiated.
- Any prior diligence reports, including a sell-side QoE if one exists.
The four things that hold up engagements
In our experience these four account for most delays, and all four are fixable in advance.
- Bank statements from a secondary account nobody mentioned. Deposits will not tie until every account is in.
- General ledger delivered as PDF. Ask the bookkeeper for an Excel export before anyone needs it urgently.
- Add-back support that does not exist. If an adjustment was based on the owner's recollection rather than a document, that is worth knowing in week one, not week four.
- Inventory that was never counted. On cash-basis books with real inventory, this is the difference between a clean answer and a caveat.
If you are the seller
None of this is adversarial. Every item on this list is something a buyer's provider is going to ask for eventually, and the difference between having it ready and assembling it under deal pressure shows up in the price.
Clean support gets a higher number, because a buyer will not pay full value for earnings they cannot verify. Assembling the list before you go to market is the cheapest thing a seller can do to protect their own valuation.
