Quality of earnings

Editorial approval scope: The team checked current source fidelity, scope boundaries, dates, arithmetic, reader usefulness, practical workflow, and general-information limitations.

A QoE review tests the earnings story

An income statement can show profit without revealing whether the same economics are likely to continue. A QoE review asks what generated earnings, when revenue was earned, whether cash arrived, which costs belong to the period, and which items deserve separate treatment.

The SBA growth guide offers general resources for expansion. Its business-acquisition guide tells buyers to investigate financial statements, tax returns, contracts, leases, existing cash flow, and purchase-price adjustments and to consider attorney and accountant support. A QoE review turns that broad diligence into a traceable earnings analysis.

It serves a buyer, seller, lender, or board. The scope, lookback period, materiality, and deliverables should be agreed before work starts.

ABA revenue needs service-level evidence

ABA revenue moves through clinical and payer workflows before becoming cash. Reviewers commonly connect the general ledger to:

• completed services by date, client, clinician, location, code, and units
• signed or completed documentation under the applicable rule
• authorization periods, provider enrollment, contracts, and fee schedules
• claims submitted, rejected, denied, paid, adjusted, or recouped
• accounts-receivable aging, credit balances, refunds, and cash deposits
• payer, client, location, service, and referral-source concentration

Revenue recorded from a schedule, unfinished note, expired authorization, or uncredentialed provider needs explanation. So does a recent collection spike caused by clearing an old backlog. The review should preserve the source and owner for every conclusion.

Costs and adjustments deserve equal care

Labor is often the largest operating cost. Reconcile payroll to actual clinical, travel, training, supervision, administrative, and overtime obligations. Test vacancies, contractor classifications, temporary coverage, bonuses, benefit accruals, owner compensation, and market-rate replacement costs.

An adjustment should identify the amount, period, rationale, evidence, recurrence judgment, and approving reviewer. Common proposals include one-time legal fees, startup costs, owner expenses, unusually high or low compensation, settlements, temporary rent, and discontinued programs.

A label such as “one-time” proves little. A cost that returns every year under different names may be recurring. A proposed saving that requires unapproved layoffs, unsafe caseloads, or a contract change belongs in a forecast or synergy case, not automatically in historical earnings.

A fictional reconciliation

Harbor Steps ABA reports $1.20 million of trailing-period earnings before the review's agreed metric. Reviewers find $170,000 of proposed additions that lack adequate support or are recurring. They also verify $80,000 of agreed, nonrecurring expenses under the transaction definition.

The illustrated result is $1,200,000 − $170,000 + $80,000 = $1,110,000. That is a reconciliation under fictional assumptions, not a valuation or purchase price.

The team also finds that one payer supplies 44% of revenue, 12% of receivables are older than 120 days, and a wage increase began after the measured period. Those findings can matter more than the arithmetic because they affect cash, risk, and the buyer's operating model.

Use findings in the right decision

A QoE report may inform a valuation model, financing, working-capital target, purchase agreement, disclosure schedule, holdback, or post-close plan. Each use needs its own owner. The QoE provider does not decide clinical staffing, legal compliance, payer coverage, or the final contract.

Keep historical earnings, buyer-specific synergies, forecast assumptions, and purchase-price terms in separate schedules. Record unresolved differences instead of forcing agreement.

Translate each material finding into a decision owner and deadline. A revenue cutoff issue may change historical earnings, a concentration issue may change financing or risk allocation, and a staffing gap may change the operating plan. Preserve the source calculation so the same fact is not adjusted twice across schedules.

Build a reproducible request list

Ask for monthly financial statements and trial balances, bank activity, tax returns, payroll registers, aging detail, claim and remittance data, payer contracts, fee schedules, authorization evidence, provider rosters, leases, related-party transactions, and location-level results. Reconcile totals before sampling details.

Useful measures include requested items received by due date divided by items due; tested revenue tied to service and cash evidence divided by tested revenue; and adjustments with complete support divided by adjustments proposed. Report open questions by value, age, owner, and decision deadline.

Prepare before the review starts

A seller can reduce avoidable delay by closing monthly books consistently, reconciling revenue to claims and deposits, documenting each adjustment, and maintaining a data dictionary for locations, payers, services, and employees. Keep original exports read-only and date every refreshed file.

Agree on who answers clinical, billing, payroll, accounting, tax, contract, and legal questions. A shared request tracker should distinguish received, incomplete, replaced, and accepted items. This keeps a clean audit trail when a number changes during diligence.

Define the report date and refresh rule as well. A fast-moving receivables or staffing picture can make an older analysis less useful at signing or closing.