Quality of earnings reports for lower middle market transactions

The buyer’s diligence team starts work.

They find the problems in your books and you find out about them at the same moment they do, in a call where you have no answer ready.

You found them months earlier, in your own advisor’s report, and you either fixed them or prepared the explanation.

An add-back gets challenged.

You know the expense was personal, but the support is a memory and a credit card statement, so the adjustment comes out of the number.

Every add-back is traced to the general ledger with documentation attached. The buyer can test it, and it holds.

Working capital gets negotiated.

The peg is argued at the closing table on the basis of two people’s recollections, and it moves against you.

The target is supported by monthly detail that was built before either side had a reason to want a particular answer.

Diligence runs long.

Weeks go by while your accountant reconstructs records, momentum leaks out of the deal, and the buyer starts renegotiating.

The analysis already exists in the form their team works in, so the process moves at the speed of the lawyers instead.

• Adjusted EBITDA bridgeEvery add-back documented and traceable to source: owner compensation, related-party rent normalized to market, personal expenses, one-time legal and professional fees, and pro forma adjustments. Each one supported so the other side can test it and it holds.
• Quality of revenueCustomer concentration, retention, pricing, and the composition of growth. Whether earnings repeat, not just what they totaled.
• Normalized working capitalA target with the monthly detail behind it. This is where most purchase price disputes originate, and where an unsupported number costs real money at closing.
• Debt and debt-like itemsWhat transfers, including accrued items sellers do not classify as debt but buyers will.

Multi-entity structures, multi-state operations, and contracts with revenue recognized over time each add scope. We identify that in the proposal rather than discovering it mid-engagement and asking for more.

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Where the target's books need work before diligence can proceed, we scope that separately and tell you before you sign, not three weeks in.

• Sell-sideRun before going to market, so the problems surface in your own advisor's report rather than the buyer's. It gives you time to fix what can be fixed and to prepare a defense for what cannot.
• Buy-sideRun under LOI to verify what the seller has represented and to test whether the adjusted EBITDA the price is built on will survive contact with the general ledger.