A prospective buyer sees $1.4 million of management-adjusted earnings, yet the ledger supports a different starting figure. The gap could be reasonable, overstated or simply undocumented. Before a quality of earnings report enters the conversation, an owner needs a record of how each proposed adjustment was calculated. We would begin with the underlying transactions, because a persuasive explanation cannot repair a missing invoice or an inconsistent reporting period.

Build a monthly earnings baseline

Start with the actual monthly profit-and-loss statements for the period under review. Reconcile their totals to the trial balance and general ledger, then identify late postings, reclassifications and adjustments that crossed month-end. Keep the original figures visible beside any management presentation.

Suppose a company reports EBITDA of $1.20 million for a trailing twelve-month period. Its management deck shows $1.28 million after proposed adjustments. The $80,000 difference needs eight lines of explanation if it comprises eight separate entries, even when those entries share a broad description.

Have the controller assign an owner to each reconciliation. Mark whether the amount originates in an invoice, payroll entry, journal entry or accrual calculation. Link the evidence to relevant ledger codes. An external accountant can then reproduce the earnings bridge.

Classify each proposed add-back

Four categories help expose weak assumptions before anyone defends them to a buyer.

A one-time expense may relate to a discontinued project or a discrete transaction. Its label alone proves little: determine whether the underlying activity will recur and whether a replacement cost follows the sale.

Owner-specific expenses require a similar test. Excess compensation, personal expenses and related-party charges may attract attention, but a new owner might have to hire someone to perform the same work. Any adjustment should account for an economically realistic replacement cost.

Timing or accrual differences belong with the accounting team. Moving an expense from December into January does not automatically improve sustainable earnings. The accountant should establish the proper period and correct the reconciliation before discussing normalization.

Finally, isolate claims without proof. Keep unsupported items out of the headline calculation. An archived AICPA discussion of M&A diligence describes how earnings questions can disrupt a transaction; its practical lesson remains relevant even though the article dates to 2016.

Tie every claim to the underlying transaction

Each adjustment should travel with a document and an explanation. For a relocation cost, keep the vendor contract, invoices, payment evidence, affected ledger accounts and the reason management regards the expense as unusual. A termination payment needs the signed agreement and payroll or bank support. An owner compensation adjustment needs actual compensation records and a defensible estimate of continuing duties.

Track payment and recognition dates separately. Note who checked the evidence and when. If a document covers several items, highlight the relevant line rather than asking the reviewer to infer the allocation.

Documentation establishes what happened. It does not by itself establish that a buyer will accept an adjustment. That judgment depends on persistence, comparability and the future operating model.

Expect questions beyond the adjustment itself

Buyer scrutiny often moves from EBITDA to cash receipts, receivables, inventory and working capital. Profit growth alongside slower collections deserves scrutiny. A supplier rebate booked in one period may require a consistency check against earlier periods.

Review related-party arrangements before assuming they vanish at closing. If an owner's property company charges below-market rent, a buyer may model a higher ongoing cost. Customer concentration can affect the reliability of earnings even when every journal entry is accurate.

The SEC's guidance on public-company non-GAAP measures illustrates why excluding normal recurring operating costs can mislead readers. That guidance addresses SEC-regulated disclosures; it does not set the rules for a privately negotiated quality of earnings review. Private-company sellers can still learn from the underlying caution about consistency.

Our role in considering transaction readiness is distinct from an accounting firm's independent analysis. Accountants determine the appropriate accounting treatment and conduct any requested QoE work.

Draft an evidence log before sharing adjusted EBITDA

A simple table makes a disputed item visible. This fictional example assumes reported EBITDA of $1,200,000 and a proposed $18,000 adjustment, producing $1,218,000 of management-adjusted EBITDA only if the full item is provisionally included.

Attach the invoice and record the accountant's conclusion outside the table. Payment evidence alone cannot justify excluding recurring costs.

Use one status for verified transaction evidence and another for an agreed normalization conclusion. Do not conflate the two.

Decide whether the records are ready

Before buyer diligence, ask whether the accounting baseline reconciles, whether each add-back has a retrievable source and whether management can explain the economic reason for excluding it. An unresolved answer is useful information: it points to work worth completing before outreach.

We recognize through our transaction experience that sellers face different reporting histories and buyer expectations. The aim is evidence an independent accountant can test. This material provides general information, not legal, tax, accounting, securities or individualized transaction advice.