Quality of Earnings Checklist for M&A Due Diligence

A Quality of Earnings (QoE) checklist is the working document deal teams use to verify a target company's reported earnings before closing an acquisition. A complete checklist walks through eight diligence sections: the data request, revenue quality, EBITDA adjustments, working capital, proof of cash, general ledger anomalies, risk flags, and final deliverables. Use the checklist below as a free standalone resource, or download the PDF for offline use.

1. Data Request Checklist

Before any analysis begins, the deal team must collect a complete data set covering at least three full years plus the trailing twelve months. Missing or incomplete data is the single largest cause of QoE delays — request everything below at kickoff to avoid costly back-and-forth later.

• ☐ Trial balances — 3 years plus TTM (monthly preferred)
• ☐ General ledger — full detail for the same periods
• ☐ Bank statements — all operating accounts for proof of cash
• ☐ AR aging — current and 12-month historical snapshots
• ☐ AP aging — current and 12-month historical snapshots
• ☐ Payroll register — for owner comp normalization
• ☐ Customer revenue detail — for concentration analysis
• ☐ Vendor spend detail — for related-party identification
• ☐ Tax returns — 3 years for book-to-tax reconciliation
• ☐ Loan agreements & lease schedules
• ☐ Capex history — to normalize maintenance vs growth

2. Revenue Quality Checklist

Revenue quality is about more than the top-line number — it tests whether reported revenue is recurring, properly recognized, and concentrated in a healthy mix of customers. Pay particular attention to customer concentration risk, which is the most common deal-killer surfaced in this section.

3. EBITDA Adjustments Checklist

Adjusted EBITDA is the headline number every deal is priced on. Standard categories of EBITDA adjustments include owner compensation, personal expenses, and one-time items. The largest single add-back on most lower-middle-market deals is owner compensation normalization — review it line by line.

• ☐ Owner compensation normalization (above/below market)
• ☐ Personal expenses run through the business
• ☐ Non-recurring revenue (one-time projects, COVID grants)
• ☐ Non-recurring expenses (legal settlements, restructuring)
• ☐ Related-party transactions at non-market terms
• ☐ Run-rate adjustments for new contracts and lost customers
• ☐ Accounting cleanup (out-of-period entries, accruals)
• ☐ Stock-based compensation
• ☐ Rent normalization (owner-occupied real estate)

4. Working Capital Checklist

The working capital peg drives the dollar-for-dollar purchase-price adjustment at close — getting it wrong means leaving cash on the table or underfunding operations day one. The full methodology is in our working capital analysis guide; the section-level checklist is below.

5. Proof of Cash Checklist

Proof of cash is the section where commingled expenses, unrecorded liabilities, and cash-basis surprises surface. Tying every bank deposit and disbursement back to the GL is non-negotiable — see the proof of cash analysis guide for the full reconciliation methodology.

• ☐ Reconcile total bank deposits to GL revenue + other receipts
• ☐ Reconcile total disbursements to GL expenses + other payments
• ☐ Identify unrecorded liabilities (checks not yet posted)
• ☐ Identify commingled personal expenses
• ☐ Verify intercompany / related-party transfer treatment
• ☐ Confirm period-end cut-off accuracy

6. General Ledger Review Checklist

Sampling 10–20% of GL transactions misses most red flags. A modern QoE reviews 100% of journal entries against a panel of anomaly tests — round dollars, period-end clustering, duplicates, manual entries to revenue, and unexplained account drift. Each test below should be run across the full GL, not a sample.

7. Risk Flags Checklist

Risk flags are the qualitative findings that sit alongside the quantitative adjustments. Any single flag below can re-trade or kill a deal — surface them early so the buyer's reps & warranties insurance, escrow, and indemnity terms can be negotiated against real evidence.

• ☐ Customer concentration over 20% of revenue
• ☐ Vendor concentration creating supply risk
• ☐ Key person / employee dependency
• ☐ Recent loss of major customer or contract
• ☐ Outstanding litigation or regulatory issues
• ☐ Tax exposure (sales tax nexus, payroll tax)
• ☐ Going-concern indicators
• ☐ Quality of accounting controls

8. Final Deliverables Checklist

The deliverable set is what the lender, buyer, and IC actually read. A defensible QoE ships a narrative PDF, supporting Excel workbook, and a transaction-level audit trail — all anchored to the adjusted EBITDA bridge that walks reported earnings to the closing number.

• ☐ QoE report (PDF, lender-ready)
• ☐ Adjusted EBITDA bridge (Excel)
• ☐ Working capital schedule (Excel)
• ☐ Proof of cash reconciliation (Excel)
• ☐ Customer concentration analysis
• ☐ Flagged transactions with audit trail
• ☐ Full Excel workbook for buyer/lender review

Running through this checklist manually takes 4–8 weeks and $20K+. Shepi runs every section automatically from your QuickBooks file — starting at $2,000.

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