Do I need a quality of earnings report to buy a small business?

There is no single rule that says a buyer must commission a quality of earnings report. Some purchases are well served by one. Others are better served by a narrower review, or by your own accountant working through the records. The useful question is what you need to be sure about before you sign, and which route answers it for the least cost and delay.

Three levels of review

A full report covers earnings, revenue, customers, working capital and debt-like items across several periods. A scoped review picks the areas that worry you most, such as revenue recognition or one large customer, and leaves the rest. A review by your own accountant uses the same raw records, with less formal output. The more complex the business, the more a fuller report tends to repay its cost.

When a lender or investor asks

Lenders and outside investors set their own conditions. Some will ask for an independent report, others will accept your accountant’s work or the seller’s financial statements. Do not guess. Ask your lender at the start which documents it needs, in what form and from whom, so you do not pay for a report that does not satisfy it.

When a lighter review may do

If the business is simple, the records are well kept and the owner is open with bank statements and tax filings, a focused review may answer your questions. Smaller owner-run businesses often have informal books, which can cut both ways: they may need more testing, or there may simply be less to test.

Questions to settle first

• What would change your decision if the numbers turned out to be wrong?
• Does anyone financing the purchase require independent work?
• Who will read the results and act on them?
• Can the seller’s records support the review you have in mind?

Making the choice

Talk to your accountant about scope before the deadline in your letter of intent is close. Ask your lawyer how the findings could be used in the agreement.