How to screen an acquisition before paying for a QoE.

Request general ledger and trial balance data early, and analyze it before committing to a full engagement. Transaction-level data reveals whether reported EBITDA is supportable well before a QoE firm is involved.

An effective screen answers six questions:

• Does the ledger foot to the trial balance and up to the financial statements
• Do monthly revenue and margin trends look organic, or smoothed
• Are the seller’s proposed add-backs traceable to actual entries
• Is customer concentration disqualifying on its own
• Are there related-party or unusual entries that require explanation
• Is working capital seasonality going to change the price mechanism

Sellers sometimes resist releasing ledger data this early. The resistance is itself information. Reasonable buyers make the request under NDA as a condition of proceeding, and a seller with clean books rarely objects.

Before an LOI, review three years of financial statements, monthly profit and loss detail, the general ledger if obtainable, revenue by customer, and the seller’s add-back schedule.

The goal at this stage is not certainty. It is avoiding a price commitment that diligence will unwind. In priority order:

• Whether reported EBITDA traces to the accounting records at all
• Whether the seller’s add-backs are documented or merely asserted
• Monthly revenue trend, with attention to any recent inflection
• Customer concentration and contract durability
• Gross margin stability, and whether declines are being hidden by mix
• Working capital seasonality, since this becomes a purchase price mechanism
• Obvious debt-like items: deferred revenue, accrued vacation, unpaid payroll taxes

A price set on unverified EBITDA is a renegotiation scheduled for later, and renegotiating from an executed LOI is a materially worse position than pricing correctly at the start.

As early as you can get data, and again at each stage where new records arrive. The cost of finding a problem rises through the deal, from free before an LOI to expensive after exclusivity and reputational after close.

A workable sequence:

• Before the LOI. Ledger-level screen on earnings quality, concentration, and add-back support. Findings here cost nothing but time and can be priced into the offer or used to walk.
• During exclusivity. Confirmatory work on working capital, debt-like items, proof of cash, and tax exposure. Findings here are negotiable but you have already committed time and legal spend.
• Before close. Verification that nothing changed and that the working capital target still holds. Findings here are disruptive and often unrecoverable.

The highest-value red flags are revenue recognized ahead of delivery, non-recurring expenses that recur every year, gross margin decline masked by product mix, deteriorating receivable aging, and undocumented owner add-backs.

The working list:

• Revenue spikes concentrated in the final month or quarter before sale
• Add-backs presented without invoices, contracts, or payroll support
• Related-party transactions on non-market terms
• Unrecorded liabilities: accrued vacation, deferred revenue, unpaid payroll taxes
• Ledger totals that do not foot to the financial statements as presented
• Deferred maintenance or capital expenditure suppressing current-period cost
• Inventory or reserve levels inconsistent with historical practice
• Customer concentration paired with expiring or unwritten contracts
• Accounting system changes mid-period, or missing months
• Prior periods restated without clear explanation

Individually most of these have innocent explanations. Clustered, they usually mean reported EBITDA will not survive scrutiny.

Rebuild it from the general ledger rather than accepting the seller’s schedule. Start from reported net income, trace each claimed adjustment to specific entries, confirm the accounts foot to the trial balance, and test whether each item is genuinely non-recurring.

Sellers and their advisors almost always present adjusted EBITDA with an add-back schedule attached. That schedule is an argument, prepared by someone paid to maximize the number. Verification means checking each line against four questions: does the entry exist, is the amount accurate, is there documentation, and does a similar item appear in other periods.

This exercise moves price more reliably than any other single piece of pre-LOI work.

Sustainability is tested by separating recurring operating performance from one-time and owner-specific effects, then asking whether the drivers of that performance survive the sale.

The questions that decide it:

• Revenue durability. Is revenue contracted or recurring, or does it depend on relationships held by the departing owner.
• Concentration. What happens to earnings if the largest customer leaves within a year of close.
• Margin trend. Is gross margin stable, and if it is declining, is the cause pricing, cost, or mix.
• Cost normalization. Does the business carry costs it will need after close but is not currently paying, such as market-rate management compensation.
• Deferred spending. Has maintenance, capital expenditure, or headcount been suppressed to improve the trailing twelve months.
• Working capital. Does growth require cash the buyer will have to fund.

Adjusted EBITDA answers what the business earned. Sustainability answers what it will keep earning, and that is what the buyer is actually purchasing.

Review the general ledger, trial balances, three years of monthly financial statements, tax returns, bank statements, revenue by customer, payroll registers, and receivable and payable aging.

Search funds face a structural problem that shapes the answer: they evaluate many targets to close one, and they cannot fund professional diligence on every candidate. That makes early access to transaction-level data disproportionately valuable, because the screen has to be cheap enough to run repeatedly.

The workable approach is one consistent screening standard applied to every target using ledger data, with paid diligence reserved for the few that clear it. Owner-operated businesses in this size range also carry heavy commingling of personal and business expense, so add-back analysis is usually where the real valuation question sits, not in revenue.

Start by footing the ledger to the trial balance and the financial statements, then move to account-level trending, vendor grouping, and a review of manual and period-end entries.

1. 1Reconcile. Confirm the ledger ties to the trial balance and up to the statements, and investigate every variance before going further.
2. 2Standardize. Map the chart of accounts into consistent categories across all periods, including any mid-year system change.
3. 3Trend. Review revenue, gross margin, and major expense accounts monthly rather than annually.
4. 4Scan. Flag round numbers, period-end concentrations, reversing entries, unfamiliar vendors, and related-party names.
5. 5Test add-backs. Trace each proposed adjustment to specific entries and confirm it appears only in the periods claimed.
6. 6Cross-reference. Verify material items against bank records, invoices, and contracts.

Manual review of a large ledger forces sampling, which is why steps 3 and 4 are usually where things get missed. Software makes complete coverage feasible inside a deal timeline.