Quality of Earnings Checklist for Buying a Business in Australia

Nigel Gordon·26 June 2026·Valuation & Pricing

A quality of earnings (QoE) analysis is the process of verifying that a business's reported profits are real, recurring, and correctly stated — before you use those profits to calculate a purchase price. In Australia, most small business sales are priced as a multiple of EBITDA or owner's earnings. If those earnings are overstated (even unintentionally), you'll overpay. The QoE checklist below walks through the categories every buyer should check, from revenue quality to owner add-backs to working capital patterns.

Why Earnings Quality Matters More Than the Number Itself

A business reporting $300K in EBITDA is worth very different amounts depending on whether that $300K is:

Recurring revenue from long-term contracts, or one-off projects that happened to spike last year
Based on market-rate expenses, or artificially low because the owner pays himself below market salary, rents from his own family trust at a discount, or hasn't replaced plant and equipment in six years
Clean and consistent across three years, or lumpy with one extraordinary year that drove the average up

The number on the page is a starting point. The quality of earnings analysis is the work you do to trust it (or not). This is covered in depth in Module 4 of the Playbook, and it follows directly from how to normalise EBITDA when buying a business.

The Three Categories That Matter

1. Revenue quality — Is the top line real, recurring, and diversified? A painting business where 60% of revenue came from one commercial building contract last year is a different beast from one with 40 residential clients split evenly. Check the source of the revenue, not just the total.

2. Expense quality — Are the add-backs legitimate? Every seller will present a set of "add-backs" — expenses they claim are one-off or personal — to inflate the reported earnings. Some are genuine (the seller's excessive salary, a one-off fit-out). Others are not (undermarket rent from a related-party trust that will revert to market the day you take over, or a "one-off" equipment repair that turns out to be annual).

3. Consistency — Do three years of financials tell the same story? I've seen businesses where year one was $180K EBITDA, year two was $160K, and year three (the one being quoted to you) was $290K. Sometimes that's real growth. Sometimes it's a contract that won't recur, a staff member who left and wasn't replaced, or expenses that were deliberately deferred into year four for you to discover. Three-year consistency is your first filter.

What the Full Checklist Covers

The complete resource below is structured as a field-by-field verification checklist across five phases:

Revenue verification (is the top line accurate and recurring?)
Expense verification (which add-backs are legitimate?)
Related-party and owner-benefit analysis
Working capital and balance sheet quality
Earnings trend and industry benchmark comparison

The checklist uses a three-column format (item / verified / notes) so you can complete it during financial due diligence and use it as a record.

For add-back-specific guidance, the EBITDA Normalisation Checklist pairs directly with this resource. For what to do when you find a problem, see the Financial Red Flags Checklist.

One accountant I worked with on a deal described a landscaping business acquisition where the buyer had accepted a $420K asking price based on reported earnings of $140K. The QoE analysis took six hours and identified that $52K of those "earnings" were artificial — below-market rent from the owner's family trust, a vehicle expense for a car the owner was taking with him, and a once-off commercial contract that finished the month before settlement. The final verified earnings were $88K, which put the fair purchase price closer to $265K. The deal still happened (at a renegotiated price), but the buyer didn't find out after the fact.

The Complete Quality of Earnings Checklist

Use this checklist during financial due diligence, after you've received 3 years of profit and loss statements, tax returns, and BAS statements. Work through each item with your accountant.

Rating guide:

✓ Verified — item checks out, no adjustments needed
~ Partial — item partially verified, minor adjustment required
✗ Problem — item not verified or requires significant adjustment
N/A — not applicable to this business

Phase 1: Revenue Verification

The goal: confirm the reported revenue is real, recurring, and attributable to the business (not the owner's personal relationships).

#	Item	Status	Notes / Adjustment
1.1	Bank statements reconcile to reported revenue for each of the last 3 years
1.2	BAS (Business Activity Statements) match reported revenue figures
1.3	Revenue breakdown by customer obtained (list of clients and amounts)
1.4	Top 5 customers verified — are they still active and contracted?
1.5	Customer concentration assessed: no single customer > 20% of revenue
1.6	One-off / non-recurring revenue identified and excluded from normalised figure
1.7	Revenue from related parties (owner's other entities, family members) identified
1.8	Related-party revenue assessed: would it continue post-sale?
1.9	Revenue trend reviewed — is year 3 an outlier vs years 1–2?
1.10	Deferred revenue checked — is income being brought forward into the sale year?
1.11	Cash-in-hand revenue assessed for likelihood of under-reporting in prior years
1.12	Confirmed whether any major contracts expire within 12 months of settlement

Phase 1 summary:

Verified recurring annual revenue: $___________
Excluded one-off items: $___________
Adjusted recurring revenue: $___________

Phase 2: Expense Verification and Add-Back Assessment

The goal: determine which seller add-backs are legitimate and which will not survive post-settlement.

#	Item	Status	Notes / Adjustment
2.1	Owner's salary add-back verified — is it above or below market rate for the role?
2.2	Market-rate replacement salary estimated for someone to do the owner's work
2.3	Superannuation contributions included in salary comparison
2.4	Owner's vehicle expenses reviewed — is vehicle staying with the business?
2.5	Personal insurance (life, income protection) run through the business identified
2.6	Personal phone, internet, or home office expenses identified
2.7	Family member wages reviewed — are they working in the business? At market rate?
2.8	One-off capital expenditure in P&L identified (not ongoing operating expense)
2.9	One-off expenses in P&L confirmed as genuinely non-recurring
2.10	Expenses that should be capitalised but are expensed to suppress profit identified
2.11	Equipment and plant: maintenance expense trend reviewed over 3 years
2.12	Equipment age assessed — deferred capex that will fall to you post-settlement
2.13	Interest expense on business loans reviewed — what debt transfers with the business?
2.14	Lease payments confirmed at arm's length market rate

Phase 2 summary:

Legitimate add-backs accepted: $___________
Add-backs rejected or adjusted: $___________
Additional expenses to include (deferred capex, below-market wages): $___________
Net adjustment to EBITDA: $___________

Phase 3: Related-Party and Owner-Benefit Analysis

This is the most commonly overlooked area in small business due diligence. Many sellers have arrangements with related entities that distort the reported earnings.

#	Item	Status	Notes / Adjustment
3.1	Rent paid to a related-party trust or entity confirmed at market rate
3.2	Market-rate comparison obtained for the premises (real estate agent quote or similar)
3.3	If rent is below market: annual rental uplift to market rate calculated
3.4	Subcontractor payments to related parties reviewed
3.5	Related-party subcontractor rates compared to market rate for the same work
3.6	Supplier or customer relationships with owner's other businesses identified
3.7	Loans between the business and related parties identified (these appear on balance sheet)
3.8	Dividends or distributions taken in lieu of salary identified (reduces reported expenses, overstates profit)
3.9	Asset usage shared between this business and owner's other entities identified

Phase 3 notes:

Phase 4: Working Capital and Balance Sheet Quality

The goal: confirm that the business has normal working capital and no hidden liabilities or obligations you're inheriting.

#	Item	Status	Notes / Adjustment
4.1	Accounts receivable (debtors) aging schedule obtained
4.2	Debtors older than 90 days identified — are they collectible?
4.3	Bad debt write-off history reviewed
4.4	Accounts payable (creditors) schedule obtained
4.5	Overdue creditors identified — are there supplier disputes or deferred payments?
4.6	Inventory counted and verified (if applicable)
4.7	Inventory for aged or slow-moving stock assessed
4.8	Employee leave liabilities (annual leave, long service leave) quantified
4.9	Confirmed whether employee entitlements transfer to you at settlement
4.10	ATO obligations checked — any overdue BAS, PAYG, or superannuation?
4.11	Workers compensation premium payments confirmed current
4.12	Deposits or retentions held by the business assessed
4.13	Customer deposits held that represent future obligations assessed
4.14	Equipment finance / chattel mortgages transferring with the business confirmed
4.15	Working capital peg agreed with seller (normal working capital to be in the business at settlement)

Phase 4 summary:

Normal working capital level confirmed at: $___________
Hidden liabilities identified: $___________
Employee leave liability transferring: $___________

Phase 5: Earnings Trend and Industry Benchmarking

The goal: confirm that normalised earnings are sustainable and consistent with industry performance.

#	Item	Status	Notes / Adjustment
5.1	Normalised EBITDA calculated for each of the last 3 financial years
5.2	3-year trend is consistent (no unexplained spike in the final year)
5.3	Gross margin trend reviewed across 3 years (expanding or contracting?)
5.4	Gross margin benchmarked against industry averages for this trade/service type
5.5	Operating expenses as % of revenue benchmarked against industry
5.6	Explanation obtained for any year-on-year variations > 15%
5.7	Forward-looking risks identified — price increases from suppliers, staff leaving, contract renewals
5.8	Management information (WIP reports, job profitability, scheduling software) reviewed
5.9	Industry-specific multiples range confirmed (see Industry Multiples Cheat Sheet)
5.10	Warranted multiple assessed based on earnings quality findings from this checklist

Phase 5 summary:

3-year average normalised EBITDA: $___________
Trailing 12-month normalised EBITDA: $___________
Assessment of earnings quality: Strong / Acceptable / Weak / Abort
Warranted multiple range: ______x to ______x EBITDA
Indicated enterprise value range: $___________ to $___________

Quality of Earnings Summary Page

Complete this after working through all five phases.

Business name: _______________________________________________

Date of analysis: _______________________________________________

Accountant / advisor completing analysis: _______________________________________________

Item	Seller's Claim	Verified / Adjusted Figure	Difference
Revenue (trailing 12m)	$	$	$
Cost of goods sold	$	$	$
Gross profit	$	$	$
Operating expenses	$	$	$
EBITDA (unadjusted)	$	$	$
Less: replacement owner salary	($ )	($ )	($ )
Add back: legitimate add-backs	$	$	$
Normalised EBITDA	$	$	$
Hidden liabilities identified	—	($ )	($ )
Final warranted earnings figure		$

Overall assessment:

Earnings are clean — proceed with offer based on asking price
Earnings require adjustment — renegotiate price based on verified figure
Significant issues identified — request further information before proceeding
Abort — earnings quality is insufficient to support the asking price

Issues requiring further information:

Recommended next steps:

How to Use This Checklist Alongside Other Resources

This checklist sits at Step 2 of a four-step valuation sequence:

Normalise EBITDA — use the EBITDA Normalisation Checklist to identify and categorise add-backs
Verify earnings quality — this checklist (you are here)
Apply the right multiple — use the Industry Multiples Cheat Sheet to determine the appropriate valuation range
Build your offer — use the Offer Price Calculation Framework to construct the final number

For the financial red flags that should make you pause or walk away, read financial red flags when buying a small business. For the mechanics of checking the numbers yourself, how to check financials when buying a business covers bank reconciliation, BAS verification, and working with the seller's accountant.

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