Almost every buyer who is new to acquisitions asks the same thing before commissioning a quality of earnings report: can I see one first? It is a fair question. You are about to spend real money and lean on the findings in a negotiation, and "trust me, it is thorough" is not an answer. So this is a walkthrough of what a QoE report actually contains, section by section, annotated against a fictional target.
Meet Meridian Mechanical, a made-up commercial HVAC services company doing roughly eight million dollars in revenue. Every number below is invented to illustrate the structure. None of it is a real deal. What is real is the shape of the report and what each section is trying to tell you.
Executive summary and scope
The first pages state what was analyzed and what was not. Period covered, entities included, the basis of the financials (cash or accrual), the records relied on, and any limitations. This section exists so that six months later, when a finding is challenged, everyone knows exactly what the analysis did and did not touch.
Read the scope before you read anything else. A report that covers three years of accrual financials for a single entity is a very different instrument than one built from one year of cash-basis books with the owner's personal expenses commingled. The scope tells you how much weight the conclusions can bear.
For Meridian, the scope note reads: three fiscal years, single operating entity, accrual-basis QuickBooks records reconciled to filed tax returns, with a caveat that fiscal 2024 job-costing detail was incomplete for two months. That caveat is not a flaw, it is honesty, and it tells you where to apply a little extra skepticism.
Adjusted EBITDA schedule
This is the heart of the report and usually the first thing a buyer flips to. The EBITDA bridge starts from reported earnings and walks, line by line, to an adjusted number that is meant to represent the true, repeatable earning power of the business under a normal owner. Every step should be a separate, defensible entry, not a single lump adjustment.
Here is Meridian's bridge:
| Line | Amount |
|---|---|
| Reported EBITDA (FY2024) | $1,150,000 |
| Owner compensation above market | +$180,000 |
| Personal vehicle and travel run through the business | +$42,000 |
| One-time litigation settlement | +$65,000 |
| Non-recurring software implementation | +$38,000 |
| Related-party rent normalized to market (below-market lease) | -$60,000 |
| Adjusted EBITDA | $1,415,000 |
Notice the last adjustment is negative. The owner leases the building to the business at below-market rent, so a new owner paying market rent will carry a higher expense, which lowers normalized earnings. Honest normalization moves in both directions. A bridge that only ever adds is a sales document, not an analysis.
Add-back detail
Behind each line of the bridge sits a supporting schedule. The add-back detail traces every adjustment to source entries in the general ledger and, ideally, shows its pattern across all years in scope. The whole point is to let you verify a claim rather than accept it.
What a buyer should look for: does each add-back tie to specific transactions, and does the "one-time" label hold up across years? An expense that appears in all three years is an operating cost wearing a costume.
For Meridian, the litigation settlement passes: it is a single entry in FY2024, tied to a named vendor dispute, with nothing comparable in the prior two years. The software implementation is shakier. The report flags that a similar "implementation" charge appeared the year before, which suggests recurring subscription cost rather than a genuine one-time project, and it recommends discounting that add-back.
Revenue quality and customer concentration
Adjusted EBITDA is only as good as the revenue underneath it. This section tests how revenue is recognized, whether it is growing or churning, and how much of it depends on a handful of relationships. Customer concentration is the number most likely to reprice a deal, because a business where one client is a quarter of revenue is a fundamentally riskier asset than one with a broad base.
A good report shows revenue by customer and by service line, the trend across years, and the terms behind the biggest relationships. Recurring maintenance contracts are worth more than one-off project revenue, and the report should separate them.
Meridian's annotated finding: the top customer is 22 percent of revenue on a contract that renews annually and is up for renewal four months after the expected close. That is not a dealbreaker, but it is a specific, datable risk you would want addressed in the purchase terms, perhaps through an escrow tied to renewal.
Proof of cash
The proof of cash is the section that separates a QoE from a pretty spreadsheet. It ties reported revenue to money that actually landed in the bank, month by month, reconciling deposits against the books. It is the closest thing diligence has to a lie detector, because it is very hard to fake cash that never arrived.
What you want to see is a clean reconciliation with small, explainable variances. Large unexplained gaps between reported revenue and bank deposits are where revenue recognition problems, or worse, tend to surface.
Meridian reconciles cleanly in every month except one, where a deposit timing difference at year-end creates a variance that fully reverses the following month. The report shows the reversal, which turns a scary-looking gap into a non-event. That is exactly the kind of thing you want documented rather than glossed over.
Net working capital analysis
This section computes net working capital across the period and establishes the basis for the working capital peg, the target level of working capital the seller must deliver at close. Get this wrong and you either overpay at closing or fight about it afterward. It is one of the most consequential and least understood parts of the deal.
The report should show a monthly working capital trend, break out receivables aging and payables, and normalize for anything seasonal. A single-point-in-time snapshot is not enough, because working capital in a services business swings with the job calendar.
Meridian's annotated observation: working capital peaks mid-summer with the cooling season and troughs in winter, a swing of a few hundred thousand dollars. Setting the peg off a single month would hand one side a windfall. The report recommends a trailing-twelve-month average as the peg basis, which is the sort of judgment that pays for the whole engagement.
Findings and red flags
The last section pulls everything into a prioritized list: the issues that should change your price, the ones that need a rep or an escrow, and the ones that are merely worth knowing. This is where the analyst's judgment shows, because a raw pile of observations is not the same as knowing which three of them matter.
For Meridian, the short list is honest and specific: discount the software add-back as likely recurring, address the top-customer renewal in the deal terms, and set the working capital peg off a full-year average rather than a single month. Three concrete actions, each traceable back to a section above.
What an example can't tell you
The structure of a QoE report is standard. The sections above appear, in roughly this order, in nearly every competent report you will ever read. But the structure is the easy part. The judgment is deal-specific, and no example can hand you that.
Whether the software add-back is truly recurring, whether a 22 percent customer is a risk or a fortress, whether the working capital swing warrants a special mechanism: those calls depend on the actual business, the actual ledger, and the actual deal. One more presentation choice worth naming is SDE versus EBITDA. For smaller, owner-operated targets, the right measure is often seller's discretionary earnings rather than EBITDA, because a single working owner's full compensation is itself the largest adjustment. A good report picks the presentation that fits the business instead of forcing every deal into the same template.
How Zenith produces this exact structure
Everything above, the scope note, the bridge, the add-back schedules, the concentration tables, the proof of cash, the working capital trend, and the flag log, is the same 40-tab workbook Zenith generates directly from the target's accounting records. Once it can read the books, the mechanical work takes about a minute: it rebuilds the financials on a consistent basis, auto-detects candidate add-backs from the actual ledger, reconciles cash, and lays out working capital month by month in the structure you just walked through.
That leaves you free to spend your time on the part an example cannot cover: the judgment. You start from an independent, fully organized report instead of a broker's summary, and you argue the deal from your own numbers.
See how the diligence workbook works or read what a full QoE engagement actually costs and why.
