The Top 3 Key Factors to Consider about Earnings

By Michael D. Rubin, CEO & Founder · Updated September 2026 · 730 words

When you evaluate a business, look past the earnings number to three things: the quality of those earnings, whether they will continue after you take over, and whether they have been verified. Two companies can report the same profit and deserve very different prices. The difference lies in how the number was built and how likely it is to repeat.

A buyer pays for future earnings using past earnings as evidence. These three factors decide how much weight that evidence can bear. Sellers can use the same lens to prepare, fixing weaknesses before a buyer finds them.

Same earnings, different businesses

Imagine two hypothetical companies that report identical adjusted earnings. The first has a handful of documented add-backs, steady margins over four years and a broad customer base. The second reaches the same figure only after a long list of add-backs, with a record year driven by one large project and books that take weeks to reconcile. A buyer will pay a noticeably higher multiple for the first, and may not bid on the second at all. On paper they look the same; on inspection they are different businesses.

1. Quality: are the earnings padded?

Most private companies present adjusted earnings, often called adjusted EBITDA: earnings before interest, taxes, depreciation and amortization, after adding back owner-specific and one-time costs. Add-backs are legitimate when they are real, such as an owner's personal vehicle, a one-time legal bill, or a relative on the payroll whose work no one will need to replace. They become a problem when there are many of them, when they are poorly documented, or when normal costs are relabeled as unusual.

Watch both directions. A one-time gain, such as selling property or equipment, can inflate a year's profit. And almost every company has some irregular expense each year, whether a new roof, an inventory write-down or a legal dispute. Treating every one as non-recurring overstates what the business really earns. See how add-backs affect a company's value.

2. Sustainability: will the earnings continue?

The question is whether the past is a fair guide to the future. Is the company at the top of its industry's cycle? Did one large contract or a burst of unusual demand drive the latest year? Will customers stay when the owner leaves? Are margins holding while costs rise? A business at its peak may be worth less than its latest year suggests, while one with steady, recurring revenue may be worth more. Uneven results need particular care; see how buyers value a company with strong revenue but inconsistent profits.

• Compare three or more years, not only the latest, and ask what the last downturn did to the business.
• Separate recurring revenue from one-off projects.
• Check how much profit depends on the owner's personal relationships.
• Look at the direction of margins, not only their level.

3. Verification: is the information accurate?

Numbers that look sound can still be wrong. Reconcile the financial statements with tax returns and bank deposits. Test receivables for amounts that will never be collected, and inventory for items that will not sell. Ask whether product returns, warranty claims and customer credits have been accounted for. Monthly results, not just annual totals, make patterns easier to test. For larger acquisitions, many buyers commission a quality of earnings review from an independent accounting firm.

Verification is also where honesty shows. A seller whose figures reconcile cleanly earns trust; one whose explanations change each time raises questions about everything else. Discovering problems after closing is the outcome all three factors exist to prevent.

Why this changes the price

Buyers apply a multiple to the earnings they believe. MDR & Associates most often sees companies in the $3 million to $100 million revenue range valued at three to seven times adjusted EBITDA. High-quality, sustainable, verified earnings push a company toward the upper end of that range; padded, peak-of-cycle or unverifiable earnings push it down, or out of the market altogether. A formal business valuation makes each of these judgments explicit, which helps buyers and sellers argue about facts rather than impressions.

How MDR & Associates presents earnings

When MDR & Associates represents a seller, the financial recast lists every adjustment with its reasoning, so buyers can test the earnings rather than take them on trust, and diligence confirms rather than rebuilds the numbers. Buyers can review the companies we represent through our buyer page.

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Questions owners ask next

What is a quality of earnings report?

It is an independent accountant's review that tests whether a company's reported and adjusted earnings are accurate and repeatable. It examines add-backs, revenue recognition, working capital and one-time items. It is common in larger and private equity acquisitions, and some lenders ask for one. The buyer usually pays, and it can save far more than it costs.

Are all add-backs suspicious?

No. Owners of private companies routinely run some personal or one-time expenses through the business, and removing them gives a truer view of earnings. The test is documentation and reasonableness: each add-back should be supported by records and should not reappear as a cost under the new owner.