Our CPA provides reviewed financials every year, but our M&A advisor says we need a full Quality of Earnings assessment before going to market. Why do buyers reject standard CPA reviews, and how do we prepare our books?

Question

Tyler Smith · Accepted Answer

A standard CPA financial review simply verifies that your statements conform to baseline accounting principles. It does not measure the underlying commercial health, repeatability, or normalization of your earnings. Buyers do not accept CPA reviews at face value; they hire specialized accounting teams to challenge every single dollar of historical profitability.

Preparing your books for scrutiny requires proactive financial hygiene eighteen to twenty-four months before entering the market.

- Accrual conversion: If you operate on cash or modified accrual accounting, convert immediately to full Generally Accepted Accounting Principles (GAAP). Buyers must see recognized revenue and matching expenses in the exact periods they occurred.
- Defensible EBITDA add-backs: Owners routinely run personal vehicles, discretionary travel, family payroll, and non-operational expenses through the business. In due diligence, buyers challenge every undocumented add-back. Maintain receipts, vendor contracts, and formal documentation justifying why each line item will not recur under new ownership.
- Revenue recognition policies: If your business sells multi-month projects, subscriptions, or deferred services, your revenue recognition must strictly align with delivery rather than invoice dates.

Commissioning a sell-side Quality of Earnings assessment before marketing the company exposes margin anomalies, balance sheet errors, and unearned revenue liabilities while you still have the runway to remediate them.