What Drives the Cost of a Quality of Earnings Report

The most common assumption is that price tracks enterprise value. It tracks complexity, and the two come apart constantly.

A business with a single profit and loss statement in one accounting file is a straightforward engagement whether it is modest or substantial. A business operating across many entities and jurisdictions, each with its own bookkeeping arrangements and shared services allocated from a parent, is a different exercise entirely at any size.

Deal size does matter, because a very small transaction cannot support the same depth of work as a larger one. But it is the second question, not the first.

There are two common outputs and they are not priced alike.

A data book is an Excel deliverable, typically running to a few dozen tabs: the adjusted EBITDA build with monthly detail, working capital analysis and the peg, net debt schedule, proof of cash, payroll reconciliation, book-to-tax reconciliation, receivables tracing, and whatever the specific deal demands.

A full report adds a written narrative document on top of that analysis.

For most transactions below the mid-market, the data book is the right answer and the written report is not needed. We rarely see a lender or investor insist on the full document at that size, and where nobody is going to require it, paying for it is spending on presentation rather than on verification. Ask whoever is quoting you which you are getting, because a quote for one is not comparable to a quote for the other.

This is the single largest swing factor, and it is almost entirely within a seller’s control before a process starts.

Scope expands when the accounting records make verification slow rather than when they reveal problems. The recurring causes:

• Messy or hybrid inventory treatment, where some purchases run through cost and others through the balance sheet, so the treatment has to be established transaction by transaction. See inventory in due diligence.
• Unreconciled bank accounts, which have to be reconciled before anything downstream means anything.
• Deferred revenue and customer deposits, which require their own analysis and are usually the most negotiated item in the deal.
• A general ledger with thin descriptions, where deposits post with no customer attached and revenue has to be rebuilt from invoices. See general ledger review.
• A mid-period accounting system change, which is the most reliable way to turn a routine reconciliation into a long one, because the two systems frequently hold data on different bases and nothing ties until that is established.
• Ledgers available only as PDF, which have to be converted before work can begin. On a business of any size that is hundreds of pages of mechanical conversion that buys no insight.

Where a seller grants read-only access to the accounting system, a significant portion of the request list disappears. Instead of asking for reports and waiting days for each round trip, the work happens directly in the file.

We have waited weeks for general ledgers on engagements where that access was not available. Every one of those round trips is time, and on a deal with an exclusivity period it is time that comes out of somewhere. See QuickBooks Online versus desktop.

A schedule of a few well-documented adjustments is quick to test. A long schedule of adjustments with no supporting workpapers is not, because each one has to be traced individually and the ones that fail have to be explained.

The add-backs that expand scope most are the ones requiring a judgement rather than a document: owner compensation normalisation, personal expenses run through the business, related-party arrangements not at market, and anything where the answer depends on whether a cost genuinely disappears after closing.

Some sectors carry analysis that simply does not exist elsewhere.

Construction and project businesses need a work in progress schedule built across several fiscal years, with over and under billing positions and retainage separated out, and they generally take longer than comparable businesses for that reason. See work in progress. Manufacturing and distribution bring inventory and purchase order reconciliation. Multi-location and franchise businesses bring shared service extraction from a parent.

The scope differs. Sell-side work is about presenting a defensible position and anticipating what a buyer will challenge. Buy-side work is about testing what has been presented, and it carries the invoice sampling, the proof of cash and the reconciliations.

Larger transactions skew toward sell-side engagements; buy-side work tends to sit at smaller enterprise values.

A typical engagement runs around three to three and a half weeks, structured as an initial request, a management call in the first week, a second and more specific request list, and occasionally a second call near the end. Construction businesses generally run longer because of the moving parts.

Compression costs money in every professional service, and diligence is no exception. If you need it faster than that, say so at scoping rather than midway through.

Worth understanding, because it explains where the hours go. A manager leads the engagement day to day. An analyst performs the reconciliations, the proof of cash and the invoice tracing. A partner scopes the deal, handles the seller conversations and flags the high-level risk areas, and stays involved throughout.

That structure is why a very small engagement does not simply cost proportionally less: there is a floor of senior time in any deal that has to happen regardless of size.

All of this is preparation, and it is worth more than negotiating on the quote:

• Reconcile your bank accounts and keep them reconciled
• Export a full general ledger in a workable format, not PDF
• Attach customer names to deposits in your ledger
• Document your inventory method and have a recent count
• Have your working papers for any add-backs you intend to claim
• Decide in advance whether you will grant read-only system access
• If you have changed accounting systems, extract the old system’s history before access lapses