Quality of earnings

A signed report. A clear basis for your decision.

You receive a quality of earnings report signed by me—Sergei Mochtchenkov, CFA—together with the supporting workbook. It sets out the period reviewed, agreed procedures, evidence, adjustments, unresolved questions and limitations. Each material finding is linked to its potential effect on earnings, cash needs or deal terms.

My signature identifies the professional responsible for the analysis; it is not an audit opinion, a certification of the accounts or a guarantee of lender acceptance. If the report is intended for a lender, agree the provider qualifications, scope and permitted reliance with that lender before work begins.

What quality of earnings tells you

A quality of earnings analysis separates reported results from the earnings a business can reasonably sustain. I reconcile management accounts to the underlying records, assess proposed adjustments and identify the assumptions that affect price, cash needs and deal terms.

The focus is historical earnings and their durability—not a promise that the forecast will be achieved. Where evidence is missing, I flag the gap rather than treating an unsupported add-back as established earnings.

Adjusted EBITDA: evidence before add-backs

I review owner compensation, related-party transactions, non-recurring costs, run-rate changes and accounting cut-off. Each proposed adjustment is traced to support, with recurring costs and unachieved savings kept separate from genuine normalization items. Adjustments can reduce earnings as well as increase them.

The bridge keeps reported EBITDA, seller adjustments and my assessment distinct. GAAP or IFRS accounting treatment is considered against the applicable framework; adjusted EBITDA is a separate, non-GAAP measure, not a substitute for the financial statements.

Revenue quality, margins and concentration

I examine monthly revenue and gross margin trends, customer concentration, recurring versus one-off sales and the effect of pricing or mix. Where the records support it, I test retention, contract terms and post-period trading to distinguish durable performance from timing effects.

Cash conversion and working capital

EBITDA does not fund a business by itself. I trace earnings into cash, review receivables ageing, inventory and payables, and identify seasonal working capital requirements. The analysis provides a basis for discussing a working capital peg—not just a single balance-sheet snapshot.

Potential debt-like and cash-like items are listed separately for agreement with your legal and transaction advisers. Their treatment depends on the purchase agreement and the specific deal, not a universal classification rule.

What I need to get started

Monthly financial statements and trial balances, the general ledger, bank reconciliations, revenue by customer, aged receivables and payables, inventory detail where relevant, and the seller’s EBITDA adjustments. A multi-year monthly history helps distinguish seasonality from a change in performance; the exact period and procedures are agreed in the scope.

Start with a non-confidential brief describing the business, transaction stage, deadline and available records. I sign an NDA before confidential documents are shared. A fixed-scope proposal follows within 24 hours; the fee and delivery schedule are agreed before work starts.

Analysis, not assurance

My signed report supports acquisition decisions for buyers, search funds and family offices, and earnings preparation for sellers. It is not a CPA attest report, audit, review or assurance opinion. Findings depend on the records and agreed procedures; intended users and permitted reliance are documented in the engagement.

For forecast stress-testing, valuation sensitivities and the wider acquisition case, the buy-side due diligence engagement extends beyond historical earnings analysis. Quality of earnings can be scoped separately or coordinated with that work, without duplicating procedures.