A transaction can move quickly once serious buyers, sellers, lenders, or investors enter the process. At that point, financial questions that once seemed routine can become central to the deal.

Can the company reproduce the numbers presented to the other side? Are EBITDA adjustments supported? How concentrated is revenue? How much working capital does the business actually need? Does the forecast reflect realistic operating assumptions?

These questions are easier to answer before the transaction timeline becomes urgent.

Transaction readiness is the process of preparing the financial information, supporting documentation, and internal team needed to respond to diligence efficiently and consistently.

For sellers, that preparation can help identify potential issues before buyers find them. For buyers, it can help determine whether the financial assumptions behind an acquisition are supported by the available information.

Here are the areas businesses should evaluate before financial due diligence accelerates.

1. Start With the Transaction Objective

Financial diligence should begin with the decision the transaction is intended to support.

A company preparing for a sale may need to demonstrate the sustainability of its earnings and prepare its financial story for prospective buyers. An acquisition team may be more concerned with validating the assumptions behind its investment model, understanding post-close cash requirements, and identifying risks.

Before gathering documents, clarify:

• What transaction is being considered?
• What is the expected timeline?
• Who are the internal decision-makers and external advisors?
• What financial questions are likely to matter most?
• Who owns the diligence process internally?

This last question is particularly important. Diligence can generate a significant volume of requests, follow-up questions, revised schedules, and supporting documentation.

Without clear ownership, the process can quickly become disorganized.

2. Make Sure the Financial Statements Tell a Consistent Story

Financial statements form the foundation of financial diligence, but simply having them available is not enough.

The numbers should also reconcile.

Buyers and advisors may compare monthly income statements and balance sheets with trial balances, general-ledger detail, year-end financial statements, tax returns, and management reporting.

If those sources present materially different numbers, the company should be able to explain why.

A diligence-ready financial package will typically make it possible to understand historical performance consistently across periods and trace material figures back to supporting records.

The objective is not to present a business with no fluctuations or unusual events. Businesses change.

The objective is to make those changes understandable and supportable.

3. Look Beyond Revenue Growth to Revenue Quality

Revenue is one of the first areas likely to receive deeper attention in a transaction.

A company may be growing, but a buyer still needs to understand where that revenue comes from and how sustainable it may be.

That means looking beyond the total revenue number.

Businesses should be prepared to analyze revenue by month and, where relevant, by customer, product, service line, or geography. They should also understand how much revenue is recurring, contracted, project-based, or one-time.

Customer concentration can be particularly important.

If one or several customers represent a significant portion of total revenue, losing one relationship could materially affect future performance.

Contract terms, renewals, retention, churn, backlog, pipeline assumptions, credits, returns, and revenue-recognition policies can all provide additional context.

For sellers, the goal should not be to hide these risks. It should be to understand them before buyers begin asking questions.

4. Understand What Is Driving Margins

Revenue alone does not explain operating performance.

A company generating strong growth while experiencing declining margins may tell a very different financial story from a company growing at the same rate while maintaining or improving profitability.

Before diligence, management should understand the factors affecting gross margin and operating expenses.

That may include:

• Pricing changes
• Labor costs
• Vendor costs
• Freight or materials
• Product or service mix
• Capacity changes
• Cost-saving initiatives
• Investments made to support growth

Historical trends should also be presented consistently.

If expenses are categorized differently from one period to another, or management reporting uses definitions that do not match the underlying financial statements, analysis becomes more difficult.

The stronger the reporting foundation, the easier it becomes to distinguish normal business movement from a potential transaction risk.

5. Be Prepared to Support Normalized Earnings

In many transactions, reported earnings are only the starting point.

Management or the seller may propose adjustments to EBITDA for items considered nonrecurring, owner-specific, related-party, or otherwise not representative of ongoing operations.

Those adjustments can matter significantly when earnings are being used as part of the transaction analysis.

But an adjustment is not automatically valid because management believes an expense will disappear after closing.

A defensible adjustment should have a clear rationale and appropriate support.

For example, the diligence process may examine whether an item actually occurred, whether it is genuinely nonrecurring, whether a replacement cost will exist after the transaction, and whether a proposed run-rate adjustment relates to an action already implemented rather than a future plan.

Invoices, payroll records, contracts, and other documentation may be necessary to support the analysis.

The key question is straightforward:

Can another party understand and reproduce the bridge from reported results to normalized earnings?

If not, an adjustment may become a point of disagreement rather than support for the financial story.

6. Connect Earnings to Working Capital and Cash Flow

A profitable company can still require significant cash to operate.

That is why financial diligence should not stop at EBITDA.

Accounts receivable, inventory, accounts payable, deferred revenue, customer deposits, accrued liabilities, capital expenditures, and other operating balances can affect the cash economics of a transaction.

Seasonality can also matter.

A working-capital balance that looks normal in one month may be unusual when viewed across a full operating cycle.

Sellers should understand what level of working capital represents normal operations and be prepared to explain unusual balances or trends.

Buyers, meanwhile, may need to determine how much working capital and cash the company will require after closing.

Ultimately, the analysis should help connect three questions:

How much does the business earn? How much of those earnings convert into cash? And how much cash must remain in the business to support normal operations?

7. Make the Forecast Defensible

Historical financial statements explain where the business has been.

A forecast attempts to explain where it may be going.

During a transaction, projections can influence expectations about growth, cash requirements, financing, and future performance. But a forecast is only as useful as the assumptions behind it.

Revenue projections should connect to identifiable drivers such as customer activity, volume, pricing, backlog, or pipeline.

Gross-margin assumptions should reflect operational realities. Payroll and operating expenses should align with hiring, capacity, and growth plans. Working capital and capital expenditures should also be incorporated where relevant.

Management should be prepared to explain not only the base case but also the variables that could change the outcome.

That may include upside and downside scenarios.

A credible forecast does not need to predict the future perfectly. It should make the assumptions behind the projection visible enough for another party to evaluate them.

8. Organize the Data Room Before the Requests Accelerate

Transaction readiness is also operational.

Even strong financial information can create unnecessary friction if documents are difficult to find, schedules use inconsistent definitions, or multiple versions circulate without explanation.

A well-managed diligence process should establish a logical data-room structure, consistent file naming, appropriate access controls, and a system for tracking requests and follow-up questions.

Submitted schedules should reconcile to source records.

When new financial periods become available, definitions should remain consistent so the analysis can be updated without rebuilding it from scratch.

This becomes particularly important as the transaction progresses and the volume of questions increases.

The goal is not simply to upload documents. It is to create an information trail that another party can follow.

9. Prepare Management, Not Just the Numbers

Financial readiness is only part of transaction readiness.

Management should also be prepared to explain the business consistently.

Key leaders should understand major financial and operating trends, unusual periods, customer risks, margin changes, and the assumptions behind the forecast.

The owner should not be the only person capable of answering every question.

Just as importantly, the company still has to operate while diligence is happening.

A transaction process can consume significant management attention. If the business loses focus and performance deteriorates during diligence, that change can become a new issue for the buyer to evaluate.

Preparing responsibilities in advance can help the team respond to diligence without allowing the transaction to overwhelm day-to-day operations.

Buyer and Seller Readiness Are Not Exactly the Same

Many preparation areas overlap, but buyers and sellers ultimately use financial information for different decisions.

A seller should focus on making the financial story consistent across management presentations, financial schedules, and the data room. Earnings adjustments should be supportable, working-capital patterns should be understood, and potential diligence issues should have a response plan before going to market.

A buyer should focus on testing the assumptions behind the acquisition. That may include financing and leverage, standalone performance versus expected synergies, integration costs, post-close working-capital requirements, cash needs, and the reporting required immediately after closing.

The same financial information may therefore be viewed from two different perspectives:

The seller is preparing the story. The buyer is testing it.

The Final Transaction Readiness Test

Before diligence begins, management should be able to answer several fundamental questions:

• Can we reproduce every major number presented to the other side?
• Are our earnings adjustments reasonable, documented, and consistent?
• Can we explain how earnings convert into cash?
• Do we understand our customer, margin, and working-capital risks?
• Is our forecast connected to identifiable operating assumptions?
• Can we respond to diligence without losing focus on current business performance?

If several of those questions are difficult to answer, there may still be financial preparation work to do.

And that is precisely why transaction readiness should begin before the transaction timeline becomes urgent.

Neither perspective is inherently “better.” They exist to support different decisions.

How Normalized Earnings Are Evaluated

Normalized earnings are often central to both types of QoE.

Reported results may contain items that do not necessarily represent ongoing operations. Analysis can therefore involve distinguishing recurring performance from unusual or nonrecurring activity.

Potential areas of review include:

Recurring vs. Nonrecurring Items

Was an expense genuinely unusual, or is it likely to occur again?

Owner-Specific and Related-Party Expenses

Does the historical cost structure reflect how the business is expected to operate under new ownership?

Run-Rate Adjustments

Have recent changes actually produced measurable results, or does the adjustment depend primarily on an expectation about the future?

Revenue Recognition and Cut-Off

Was revenue recorded in the appropriate period, and are unusual transactions influencing the historical trend?

The important principle is that an adjustment should not be accepted simply because it increases adjusted EBITDA.

Adjustments should be supportable and reproducible.

A seller may prepare them. A buyer may challenge them. The underlying financial evidence matters to both.

Why Working Capital Matters

Earnings are only part of the transaction story.

A profitable company still requires sufficient working capital to operate after closing.

QoE analysis may therefore examine accounts receivable, inventory, accounts payable, deferred revenue, seasonality, and other operating balances to understand what a normal level of working capital looks like.

From the Seller’s Perspective

The objective is generally to prepare a defensible view of normal working capital and explain unusual balances, seasonality, growth, or recent operational changes.

From the Buyer’s Perspective

The question becomes:

How much working capital will this business actually need after closing?

The buyer may evaluate whether the proposed target reflects normal operations and whether additional cash could be required after the transaction.

Because working-capital mechanics can influence the cash ultimately delivered or retained at closing, this analysis can have direct economic consequences.

When Should a Seller Consider a Sell-Side QoE?

Not every transaction requires the same level of diligence, but sell-side QoE may be particularly useful when:

• Financial reporting has been inconsistent
• Proposed earnings adjustments are significant or complex
• The company has experienced rapid growth
• Revenue mix has changed
• The business has completed acquisitions
• Margins have been volatile
• Customer concentration is significant
• Management wants to identify financial questions before the buyer controls the diligence timeline

The earlier these issues are understood, the more time management has to prepare.

When Should a Buyer Consider a Buy-Side QoE?

Buy-side QoE can become particularly relevant when:

• Purchase price depends heavily on adjusted EBITDA
• Revenue recognition is complex
• Customer concentration is significant
• Working-capital requirements are material
• The business has experienced rapid growth or operational changes
• The acquisition involves debt or outside capital
• Management needs a clearer understanding of post-close cash requirements

The analysis can also inform areas beyond diligence, including transaction structure and post-close planning.

Can a Buyer Rely on the Seller’s QoE?

A sell-side QoE can make a transaction process more efficient.

It may provide organized schedules, identify key financial issues, and give buyers a useful starting point for their own analysis.

But it does not eliminate the need for independent buyer judgment.

The buyer has its own investment thesis, financing structure, risk tolerance, and assumptions. Its diligence team may therefore refine the scope, challenge certain adjustments, request updated periods, or investigate issues that are particularly relevant to the proposed acquisition.

Access to underlying records and supporting information remains important.

A strong sell-side QoE can improve the quality of the conversation. It does not automatically answer every question a buyer should ask.

Common Misunderstandings About Quality of Earnings

There are several misconceptions worth avoiding.

A QoE report does not guarantee a transaction will close.
Financial diligence is only one component of a broader transaction process.

A QoE report is not an audit opinion.
The objectives and procedures are different.

A QoE report does not determine company value by itself.
Its findings may influence valuation assumptions, but value depends on a broader set of financial, operational, strategic, and market considerations.

More adjustments do not automatically mean stronger earnings.
The quality and supportability of adjustments matter more than their quantity.

A clean QoE does not eliminate transaction risk.
Operational, commercial, legal, tax, integration, and other risks can remain even when the financial analysis is strong.

Final Takeaway: Start With the Decision the Report Must Support

Sell-side and buy-side Quality of Earnings reports may analyze many of the same financial records, but they are designed to answer different questions.

For the seller, the emphasis is preparation: understand the financial story, support key adjustments, prepare working-capital analysis, and identify issues before buyer diligence accelerates.

For the buyer, the emphasis is validation: test sustainable earnings, evaluate assumptions, understand working-capital requirements, and identify financial risks that could affect the economics of the transaction.

A useful QoE engagement therefore begins with the decision it needs to support.

The objective is not simply to produce another financial report. It is to help buyers and sellers understand the earnings they are relying on—and the conditions and risks that could change the deal.

Preparing to Buy or Sell a Business?

CO Capital Advisory Group provides M&A Advisory and Financial Due Diligence support to help buyers and sellers evaluate the financial questions behind a transaction.