Who prepares a quality of earnings report?

Quality of earnings work is done by accountants, but not every accountant does it. The people who prepare these reports spend their time on acquisitions, and they know how to test a seller’s numbers without disturbing the business. Who you hire, and who they report to, decides how much weight anyone can place on the result.

The kinds of firms that do the work

Transaction advisory groups inside large accounting firms prepare many of the reports on bigger acquisitions. Mid-sized and local practices do the same work for smaller businesses, often through a partner who has handled many purchases. The label on the service varies, so ask what the engagement actually involves and who on the team will review the files, rather than relying on the firm’s name.

Whose side the firm is on

A report belongs to the party that commissioned it. A buyer’s report tests the seller’s claims and is written for the buyer, and sometimes for the lender if the engagement letter allows it. A seller’s report is prepared ahead of a sale so problems surface early, and buyers will usually want their own advisers to test it. Check who may rely on the report before you pay for one.

Independence from the seller’s accountant

The seller’s regular accountant knows the books well, but is also the author of them. A reviewer should be separate from that relationship, with no stake in the outcome. Ask any firm you are considering whether it has worked for the seller or the broker, and how it handles a conflict.

Choosing and scoping a provider

Interview two or three firms. Ask about recent small-business acquisitions in your industry, who does the fieldwork, and how fees are set. Then agree the scope in writing: which periods, which questions, what deliverable, and when. Share the engagement letter with your lawyer, and ask your lender whether it has requirements about who prepares the report.