Sell-side quality of earnings: what to have on record before the review begins
By Derwin Lucas ·
A sell-side quality of earnings review is commissioned by the seller before a sale, so the earnings a buyer will underwrite are tested on the seller’s timetable rather than the buyer’s. It asks what the buyer’s own team will ask: whether adjusted EBITDA is supported, whether revenue turns into cash, what working capital really holds, and whether anything has been restated. In a home-services roll-up each of those questions is asked brand by brand, and the brands kept their books their own way before they joined.
Quality of earnings readiness is less about preparing a schedule than about whether the answers already exist. This guide sets out six things a QoE team tests and what a record of each looks like, using Goverisyn’s demonstration portfolio, with synthetic data.
What a quality of earnings review tests, and what the record shows
Exhibit 1. Six tests and the record behind each, June 2026 (demonstration portfolio, synthetic data)
| What is tested | The question | What the record shows |
|---|---|---|
| Adjusted EBITDA | Is each add-back supported, and on which definition? | $8,194k management-accepted and $8,118k governed, twelve months; the $76k between them is owner compensation, $54k supported with judgment and $22k unsupported |
| Cash roll-forward (operational proof of cash) | Does reported revenue turn into cash received? | For the three brands with payment records, June collections of $1,458k, of which $3k is not matched to a contract; the roll-forward closes with no difference |
| Customer deposits | What does the business owe for work not yet done? | For the 3 of 30 brands with payment records, $604k of deposits held, in a separate column from $528k of receivables and never offset against them |
| Pro forma acquisitions | Are pre-acquisition earnings supported? | $79k for one brand’s months before ownership: $73.6k from the seller’s statements and $5.0k of transaction adjustments; two months not covered, stated as a gap |
| Restatements | Has anything been changed after it was first reported, and why? | Two June restatements, each with the reason the brand gave; the first submission kept |
| Coverage | Which brands and months are in the figure? | 29 of 30 brands for June; the missing brand named, and nothing estimated in its place |
How each test is answered from a record
1Adjusted EBITDA: each add-back, classified
A quality of earnings team re-performs the add-back schedule. The question isn’t whether management’s figure adds up, it is what supports each line. Where each add-back already carries the classification the client’s named reviewer gave it, the review starts from that classification instead of reconstructing it, and the difference between management’s figure and the supported one is already stated. At an illustrative 8.0× multiple, the $76k between the two figures is $608k of enterprise value.Which add-backs hold up
2Proof of cash: from work completed to cash collected
A QoE proof of cash ties bank receipts to recorded revenue, from bank statements. The record holds the operational half: a monthly roll-forward from work completed to cash expected to cash collected, through deposits taken at signing, receivables after completion and refunds on cancelled jobs, for the 3 of 30 brands with payment records. The bank tie-out is the QoE team’s. When the roll-forward closes with no difference, the small exceptions are what remain to explain. In the demonstration, one brand collected $577.9k from January to June, and $11.1k of it, 1.9%, is not matched to a contract. A review will ask what that is. The record already shows that it exists.
3Customer deposits: a liability, stated as one
In-home sales usually take a deposit at signing, weeks before the work is done. Until then the deposit is owed to the customer, in work or in refund. Whether deposits sit in the net working capital peg or are treated as debt-like is negotiated between the parties, and the first requirement is that they be stated as what they are. In the demonstration, $604k of deposits sits in a separate column from $528k of receivables and is never offset against them. Receivables are owed to the business; deposits are owed by it.
4Restatements: what changed, when and why
A review will ask what changed after it was first reported. What matters is whether the change and its reason are on record. In the demonstration, two brands restated June: one after converting its accounting system, which moved sales commissions out of cost of goods, and one that booked its warranty reserve after its first submission. Each restatement carries the brand’s reason, and the first submission stays in the record.
5Coverage: which brands and months are in the figure
A total that leaves out a brand is not wrong, provided it says so. A total that fills the gap with an estimate is a figure the review has to unpick. In the demonstration, one brand had not submitted June, so June covers 29 of 30 brands and every figure it affects carries the same qualification.
Exit readiness is built month by month
Most sell-side preparation begins when a sale is decided, which is when the people who made each decision are hardest to find. The controller who approved an add-back may have left, a brand may have changed accounting systems, and the support for a twelve-month figure now spans two ledgers.
In Goverisyn, these answers are kept as the months close. Add-backs are classified by the client’s named reviewer when they are taken, cash and backlog roll forward each month and close to the record, deposits are held as liabilities, restatements are recorded with their reasons, and every total states the brands and months it covers. When the review begins, the record is there to be tested.
What this guide does not claim
Goverisyn is not a quality of earnings provider, an auditor or an assurance engagement, and a record does not replace the review. The QoE team does its own testing and reaches its own conclusions; the buyer’s does the same. How deposits or any other item are treated in a working-capital target is a matter for the parties. The figures here are from a demonstration portfolio with synthetic data.
The brands to look at first
Take the brands that carry most of adjusted EBITDA, and for each one check the six tests in order: add-backs classified, cash rolled forward, deposits stated, pro forma months supported, restatements explained, coverage named. Then look at every brand that changed accounting systems or definitions in the last two years. That is where support most often spans two ledgers.
The questions a buyer or lender asks of the whole figure are in Adjusted EBITDA diligence questions for home-services roll-ups, and how a change in basis shows up as growth in EBITDA growth since acquisition. Goverisyn’s Portfolio Measurement Review tests a documented basis across selected brands, after a free 45-minute Portfolio Review.
More guides on financials
EBITDA comparability across portfolio companies
EBITDA growth since acquisition: separating performance from changes in basis
Adjusted EBITDA diligence questions for home-services roll-ups
EBITDA add-backs: which ones hold up, and the record that shows it
Covenant EBITDA vs adjusted EBITDA: what the credit agreement counts
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By Derwin Lucas, founder of Goverisyn, with a career in management and information systems in home services. Published . About Goverisyn