Earnings quality

Quality of Earnings

Quality of earnings asks whether the profit used to price a business is recurring, supportable and likely to survive the ownership change.

Buyer lens

Rebuild the earnings bridge before treating SDE or EBITDA as a valuation fact.

Seller lens

Prepare a conservative earnings bridge before a buyer starts challenging the recast line by line.

Why it matters

  • Reported profit can contain temporary revenue, owner-specific economics or unsupported adjustments.
  • A mathematically correct multiple can still produce the wrong price if the denominator is wrong.
  • Cash conversion, customers and operating dependencies can change the quality of the same accounting earnings.

Evidence to reconcile

  • Monthly P&Ls and general ledger
  • Tax returns and bank support
  • Add-back schedule with source documents
  • Revenue and gross-margin detail
  • Owner/family compensation and role map