# Quality of earnings, explained

This is educational. It is not an audit and not financial advice.

A quality-of-earnings review is a buyer's or seller's look at whether the profit in the offering memorandum is the profit a new owner would keep. It is not a statutory audit. A CPA does it. NewHands's directory lists sample placeholders only — those firms are not real and are labeled that way.

The work usually covers revenue quality (one customer, one season, cash versus accrual), add-backs that will not recur, owner compensation versus a replacement manager, debt-like items (deferred revenue, gift cards, unpaid sales tax), and a working-capital peg so the buyer is not purchasing an empty checking account.

Ask for the tie-out from the tax return to the SDE schedule. If an add-back has happened three years running, it is probably a cost, not an add-back. The worksheet on this site does the arithmetic. It does not decide which lines are legitimate.