Quality of Earnings
Know What You’re Paying For Before You Invest
Quality of Earnings reviews for investors and lenders. We test the figures a deal rests on before capital is committed, while price and terms can still change.
The Problem
A Polished Report Can Carry the Wrong Numbers
The report arrives and the totals tie. The information looks ready to use, but whether it’s right depends on the work behind it, not how polished it looks.
Investors price deals on those numbers. If revenue or earnings are overstated, the price is too, and the investor owns less of the company for the same check. For a lender, the loan is sized against earnings that aren’t there.
What We Found in One Review
A SaaS Company Whose Books Looked Fine
FinStrat reconciled all 176 customer contracts from 2024 to 2026, nearly $10 million of contract value, against every invoice issued.
$870K
Lower revenue than originally booked over 18 months, roughly 12%
$1.85M
Customer payments applied to the wrong invoices
$586K
The prior provider’s plug entries, with no transactions behind them
$540K
Bonuses and commissions carried as an asset instead of expensed
Figures as of October 2026, rounded. The client is not named.
Why the Numbers Looked Right
Why the Report Looked Right When It Wasn’t
Plug entries made the accounts balance. After a system move, the prior provider made the accounts balance with entries that had no transactions behind them. The monthly totals tied.
Software exchanges were booked as revenue. No cash changed hands and neither side used the other’s software, so the exchanges could not count as revenue. Reversing them lowered revenue by about $970,000.
Many outside providers are built for volume. The effort goes into closing each month on time, not into proving the numbers are right.
What the Review Covers
Both Statements, Tested Against the Source
We test the material figures on both the income statement and the balance sheet.
First-stage review. Tests the figures an investment or loan rests on. We agree on the scope with you and the company, test a sample of material figures against source documents, and report what we find.
Full review. Where the first stage finds gaps, you can extend it to a full review: adjusted earnings with every adjustment supported, working capital, and reported results matched to cash.
How It Works
Four Steps, Before Capital Is Committed
Scope
We agree on the scope with the investor or lender and the company.
Access
The company provides its source documents and agrees FinStrat may share the findings.
Test
We test the material figures on both statements against the source documents.
Report
You get what we found, while price and terms can still change.
Fixed Fees, Scoped to the Deal
Each review has a fixed fee, agreed before work starts. The first-stage fee is credited toward a full review. Firms with steady deal flow can buy an annual program of reviews at a lower price per review.
A Review the Borrower Pays For
From October 1, 2026, the SBA requires an independent Quality of Earnings review on acquisition and expansion loans with a purchase price of $3 million or more. Owner buyouts, ESOPs and co-ops are exempt.
- Done for the lender’s benefit, independent of the borrower and the seller.
- Put FinStrat on your provider list. Your bank engages FinStrat, and the fee can be charged to the borrower and paid at closing.
- Both statements tested: the earnings you lend against, and the receivables and assets behind the loan.
- Buyer brought its own report? We review it as your reviewer, and you can rely on it once we accept it.
Sources: SBA SOP 50 10 8.1; SBA Information Notice 5000-882227
Five Questions to Ask Before the Next Decision
If reported revenue were 10% too high, how much of the price would go with it?
When did anyone last match reported revenue to cash in the bank?
How much of reported earnings comes from one-time items or adjustments no one has checked?
Which balances on the books have no one tied back to a contract, invoice or statement?
Who outside the people who keep the books has checked the numbers?
Before Your Next Investment, Follow-On or Loan
Ask FinStrat to scope a Quality of Earnings review.
