A quality of earnings report at TAS is built from ten procedures. Together they test whether the earnings a deal is priced on are real and whether they are likely to continue under a new owner. The first procedures tie reported revenue to bank deposits and filed tax returns. The rest build on that: add-backs, trends, customers, working capital, the CIM, a five-year monthly projection model, a risks and opportunities summary and a full management Q&A.
This article walks through what the procedures do, in plain language. How the finished deck and workbook are laid out is covered on the sample quality of earnings report page.
| Procedure | The question it answers | What it is tested against |
|---|---|---|
| Cash proof and bank statement reconciliation | Did the reported revenue arrive in the bank? | Bank statements for the operating accounts |
| Tax return reconciliation | Do the books match what was filed? | Three years of filed tax returns and IRS transcript data |
| Documented add-backs and adjustments | Which expenses go away under a new owner, and which new ones appear? | Invoices, payroll records and statements |
| Trend and margin analysis | Are revenue and margins rising, falling or flat, and why? | The monthly P&L across the period |
| Customer analysis, including concentration | How much revenue depends on a few customers? | Revenue by customer from the general ledger |
| Working capital analysis | What does the business need on hand to keep running? | Receivables, inventory, payables and other balances |
| CIM reconciliation | How do the tested figures compare to the CIM? | The CIM, line by line |
| Five-year monthly projection model | What could the next five years look like? | Tested history and stated assumptions |
| Risks and opportunities summary | What could change earnings after closing? | Findings from the other procedures |
| Full management Q&A | What explains the differences? | Written answers and documents from management |
Cash proof and bank statement reconciliation. Total deposits come off the bank statements month by month. Deposits that are not revenue come out: loan proceeds, owner contributions, transfers between accounts, refunds. What is left is compared to reported revenue. Differences are listed, not netted away. Some are timing. Some are bookkeeping errors. Some have no explanation yet, and those go to the management Q&A. Why this procedure carries so much weight is covered in proof of cash.
Tax return reconciliation. The books are tied to three years of filed tax returns and to IRS transcript data. The transcript comparison shows whether the returns provided match what was filed. Differences between book income and taxable income are common and often ordinary, such as depreciation methods or expenses that are only partly deductible. They are listed line by line, so a buyer and lender can see which ones touch earnings and which ones do not.
If a figure cannot be tied to a source document, the report says so plainly. It does not estimate it.
Documented add-backs and adjustments. Add-backs are expenses that will not continue under a new owner: owner pay above market, personal expenses run through the business, one-time costs. A QoE tests them against invoices, payroll records and statements. An add-back with only a description behind it is shown as unsupported, along with the question that would support it. Adjustments can also run the other way, such as a market salary for a role the owner fills today without pay. See which add-backs survive diligence.
CIM reconciliation. The tested figures are set next to the CIM, year by year, with the differences itemized. An illustration with round numbers: a CIM shows $1,000,000 of SDE. The tax reconciliation moves $40,000 of revenue into a different year. Another $80,000 of add-backs have no support beyond the owner's description. Tested SDE is $880,000. The report shows both items and the $120,000 difference, so the conversation is about two specific items rather than one total.
Trend and margin analysis. Revenue, gross margin and operating expenses are laid out by month across the period. The point is direction and the reasons for it: a price increase, a lost contract, seasonality, a change in how costs are recorded. A margin that improves while sales fall is a pattern worth asking about.
Customer analysis, including concentration. Revenue is broken out by customer to show how much of it depends on a few accounts, and which customers came and went during the period. Lenders and buyers commonly look hard at concentration, because losing one large customer after closing can change debt coverage quickly.
Working capital analysis. Receivables, inventory, work in progress, payables, accrued payroll and deferred revenue are tracked over the trailing twelve months to show the level the business normally runs on. That level is often negotiated into the purchase agreement. See working capital in an SBA acquisition.
Five-year monthly projection model. The model starts from the tested figures, not the CIM, and runs five years by month. Monthly matters because seasonality and loan payments land in specific months, and an annual total can hide a tight quarter. The assumptions are written out so a buyer or lender can change them.
Risks and opportunities summary. This pulls the findings into the items that affect how durable earnings are after closing: a concentrated customer base, equipment that will need replacing, a contract up for renewal, prices that have not moved in years. It describes what was found. Whether a risk changes the deal is the buyer's decision.
Questions come up throughout the work: a deposit that does not match an invoice, an add-back without support, a customer that disappeared. They go to the company in writing, and the answers are recorded next to the questions, along with any documents provided. Items without an answer stay listed as open rather than dropping out of the report. For a buyer, the Q&A is the record of what was asked, what was answered and what is still outstanding, and it is meant to be read in full.
The Q&A also sets most of the timeline. The work generally takes two to four weeks from receipt of documents, and the company's response time sets most of the pace.
A full report in a slide deck, plus the workbook behind it, walked through on a call. The deck presents the findings. The workbook holds the detail: the monthly figures, the reconciliations, the add-back support, the projection model and the Q&A. The sample report page shows how the sections and tabs are organized, and sample reports are available on request.
The work is done by a U.S.-based team and reviewed in-house by a CPA-led team. TAS has completed more than 600 QoE engagements and takes on about 40 a month.
Yes. The fee is $7,500 flat for SBA-sized deals, whether or not SBA financing is used, with no hourly billing. Larger deals are scoped and priced to the work after a call, and the fee is quoted before work starts. An added fee applies when the company has no financial statements and they have to be built, or when the deal includes more than one business, quoted once the documents are in. Details are on the pricing page.
No. A valuation estimates what the business is worth. A QoE tests the earnings a valuation and a price are built on. On SBA loans where the business purchase price is $3 million or more, the QoE supplements the business valuation. It does not replace it. Confirm with your lender how they apply the rule to your deal.
The report says so plainly and does not estimate it. The item is listed with the remaining difference and the open question, so the buyer and lender can decide how much weight to give it.
Business buyers using SBA 7(a) loans, searchers, independent sponsors, SBA lenders, business owners preparing to sell, and brokers. On SBA Initial Acquisition and Business Expansion loans where the business purchase price is $3 million or more, the QoE has to come from an independent financial professional engaged by and acting on behalf of the lender. Partner or owner buyouts and ESOP or cooperative conversions are exempt.