For many owners, the surprise isn’t that buyers ask tough questions; it’s how deeply those questions go into the numbers behind the deal story. In today’s M&A market, a quality of earnings (“QoE”) and broader financial due diligence are standard, not optional. Buyers rely on that work to test both performance and price.
That level of scrutiny can work for you or against you. Well-organized financial information, clear support for adjusted earnings, and thoughtful preparation for likely questions help reduce the risk of surprises and delays. Just as importantly, they allow management to stay focused on running the business instead of reacting to issues that could have been addressed months earlier.
By addressing key financial, operational, and process items before going to market, sellers make it easier for buyers to understand the business, move through diligence more efficiently, and gain confidence in the valuation story. The 10 steps below outline practical actions that can help streamline both the quality of earnings and the broader diligence process.
Reliable financial information is the foundation of an efficient diligence process. Before going to market, make sure recent year-end and year-to-date financial statements are closed, reconciled, and prepared consistently—so buyers aren’t analyzing numbers that continue to change after they’ve been shared.
This includes reconciling key balance sheet accounts, ensuring subledgers tie to the financial statements, and adding structure to the monthly close if the process has historically been informal.
Normalization adjustments typically receive significant attention in a QoE because buyers want to understand what earnings look like on a go-forward basis. A clear, well-supported schedule of non-recurring, non-operating, and discretionary items—prepared before diligence begins—helps ensure adjusted EBITDA is backed by documentation rather than memory or rough estimates.
This is especially important in owner-led businesses, where personal or discretionary expenses may run through the company. Identify these items at both the account and transaction level and reconcile them to the general ledger or other supporting records so the diligence team can trace and evaluate them efficiently.
The same discipline applies to one-time items. If the business incurred unusual consulting costs, severance, major systems implementations, transaction-related spending, or other isolated expenses, be ready to quantify the amounts and explain why they should not be viewed as part of normal operations.
Buyers typically want more than a high-level income statement. They want to understand what is driving revenue and margin performance, whether recent positive trends are sustainable, and whether unfavorable trends are temporary or structural. Be prepared to analyze results by the dimensions that matter most in the business, such as customer, product, or service line, location, or sales channel.
When that analysis is already organized, follow-up questions tend to move faster, and the overall picture becomes clearer.
Working capital is often central to both diligence and transaction negotiations. Review receivables, payables, inventory, and accrued liabilities from a buyer’s perspective, and address obvious issues before the process begins.
Accounts receivable aging should tie to the general ledger, with stale items evaluated and collection issues identified early. Inventory records should be current, and slow‑moving or obsolete items should be addressed rather than left for a buyer to uncover later.
Apply the same lens to payables and accruals. The goal isn’t to create a perfect balance sheet; it’s to ensure the accounts are supportable, understandable, and free of legacy items that can become distractions during diligence.
Related-party transactions are common in closely held businesses, but they often become an important diligence topic because buyers need to understand which costs and benefits will continue after closing. For example, an owner might have the operating company paying rent to an LLC he or she also owns, or paying a management fee to another family-owned entity. Sellers should document these arrangements clearly, including who the parties are, how the amounts are determined, and whether the arrangements will remain in place after the transaction.
Many diligence questions eventually lead back to an underlying agreement. If a buyer wants to confirm pricing, lease terms, debt obligations, insurance coverage, or other commitments, management should be able to provide the relevant document(s) without a lengthy search or having to wait on a third-party representative to supply information.
Sellers should compile major customer contracts, key vendor agreements, real estate and equipment leases, loan documents, insurance policies, and other material arrangements that help explain the company’s financial results.
A QoE is not only about the numbers. It is also about how the business arrives at those numbers. Sellers should document the key accounting and operational policies that have a meaningful impact on financial reporting and earnings trends. This may include revenue recognition practices, treatment of discounts and credits, capitalization policies, reserve methodologies, inventory costing, and procedures for recording accruals.
Operational policies may matter just as much. If the company changed pricing practices, contract approval procedures, or location-level reporting methods, those changes could affect comparability and should be documented before diligence begins.
Even well-prepared companies can lose efficiency if no one is coordinating the process. Identify a clear internal diligence lead before the first request list arrives. That person doesn’t need to answer every question personally, but they should manage the flow of information, track open items, coordinate internal responses, and maintain consistency across shared materials.
A designated “diligence quarterback” also helps minimize disruption to day-to-day operations. Centralized coordination reduces the risk of overlapping requests and allows management to stay focused on running the business while diligence moves forward.
Preparation can save significant time during diligence. Buyers typically want to understand what is driving growth, whether margins are sustainable, how concentrated the customer base is, and what operational or commercial risks could affect future performance.
Be ready with concise, supportable answers tied to historical results. If growth was driven by new customers, price increases, expanded capacity, or a favorable mix, document it clearly. If margins improved due to labor changes, product mix, vendor pricing, or operational efficiencies, the underlying data should support that explanation.
The same applies to areas of risk. Whether the issue is customer concentration, reliance on key personnel, equipment needs, or underperforming locations, it is usually more effective to address these matters directly than to respond to them late in the process.
A QoE typically involves analyzing how revenue, margins, and key expenses have changed over time—not just where they stand today—often at the account level. That analysis becomes more difficult when the chart of accounts or financial reporting structure has changed. Identify any mapping changes over the past three years and prepare schedules that clearly tie prior-period accounts to the current presentation.
This is particularly important when accounts have been merged, renamed, reclassified, or moved between cost of sales and operating expenses. Without a clear mapping, buyers may misinterpret margin trends or incorrectly attribute changes in profitability to business performance rather than presentation differences.
Sellers do not need perfect financial statements to run a successful process, but they do need organized, supportable information and a clear understanding of the questions buyers are likely to ask.
For owners, that preparation does more than shorten a request list. It reduces management distraction, strengthens the support for adjusted earnings, and helps the business present a more credible and coherent valuation story when diligence begins.
The goal is not to eliminate scrutiny, but to be ready for it so diligence can move efficiently, and buyers can rely on the numbers behind the deal.
Reach out to GBQ's Transaction Advisory Services team today for more information and assistance.