Three Basic Factors of Earnings

By Michael D. Rubin, CEO & Founder · Updated September 2026 · 721 words

Buyers judge earnings on three factors beyond the headline figure: their quality, meaning how much comes from real, repeatable operations; their sustainability after the sale; and how easily they can be verified. Two companies can report identical earnings and receive very different offers because they score differently on these three tests.

Each factor affects the price in its own way. Weak quality lowers the earnings a buyer accepts, weak sustainability lowers the multiple, and weak verification invites delays and price cuts late in the deal.

Quality: how much of the number is real and repeatable

High-quality earnings come from the company's ongoing operations. Low-quality earnings are padded with one-time gains, such as the sale of a building or an unusual insurance recovery, or with a long list of add-backs, the adjustments that remove expenses a seller argues will not recur.

Some unusual costs happen every year, just not the same ones: a roof one year, a lawsuit the next, an inventory write-down after that. A buyer knows this. A recast that removes every unusual expense and allows for none is not credible, and a buyer will rebuild it with an allowance of its own. Be more conservative than the buyer expects, and your remaining adjustments are more likely to be accepted.

Watch the other direction as well. Income that will not continue, such as rent from subletting space the buyer will need, interest on excess cash or a one-off consulting job, should come out of recurring earnings just as one-time expenses are added back.

Sustainability: will the earnings continue under a new owner?

The central question is whether the buyer is acquiring the company at the top of a cycle or in the middle of steady growth. Buyers look at the trend over three years or more, customer retention, the share of revenue under contract, pricing power, the health of the industry and the owner's role. Earnings that depend on the owner's personal relationships, a single large project or an unusually good year are discounted.

Evidence helps. Retention figures, renewal rates, backlog and a record of meeting your own forecasts all turn a claim of sustainability into something a buyer can check.

Verification: can the buyer prove it?

The buyer needs to know that the information is accurate, current and unbiased. Do the financial statements tie to tax returns and bank statements? Has the company set aside reasonable reserves for product returns, warranty claims and receivables that will not be collected? Are there claims, disputes or liabilities that have not been mentioned?

Nothing damages a deal faster than a discovery that suggests the seller was not forthcoming. Even a small undisclosed problem makes a buyer question everything else.

Verification also covers the non-financial claims a seller makes: customer counts, contract terms, licenses, the condition of equipment. Keep the documents that support each of them organized before the first buyer asks, and due diligence becomes confirmation rather than investigation.

How the three factors show up in an offer

Each weakness costs the seller in a different way. Our answer on reducing the risk of a buyer retrading the price explains how preparation limits the last of them.

• Weak quality: the buyer accepts a lower adjusted earnings figure, which the multiple then magnifies.
• Weak sustainability: a lower multiple, or part of the price moved into an earnout that depends on future results.
• Weak verification: longer due diligence, larger escrow holdbacks, and a higher risk of the buyer retrading, meaning lowering the agreed price before closing.

Strengthening all three before a sale

• Keep add-backs few, genuine and documented; our answer on how add-backs affect value shows what buyers accept.
• Track and report customer retention, contract renewals and backlog every month.
• Move to accrual-based statements reviewed by your CPA, and consider a sell-side Quality of Earnings review.
• Set realistic reserves for returns, warranties and bad debts.
• List every known dispute, claim and contingent liability, so you can disclose them on your own terms.

How we present your earnings

MDR & Associates builds a financial recast for every company we take to market, showing normalized earnings with each adjustment explained, and we prepare it with all three tests in mind. A formal written report is available through our business valuation service. To see how your earnings translate into a value range, request a free valuation snapshot.

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Questions owners ask next

Which of the three factors matters most?

They work together, but sustainability usually has the largest effect on price because it drives the multiple. Quality and verification decide whether the buyer accepts your earnings figure at all. A strong story on sustainability does little if the numbers behind it cannot be proven.

How far back will buyers look to judge sustainability?

Usually three full years plus the current year to date, and sometimes longer for cyclical businesses. They want to see how the company performed in weaker periods, not only in its best year, so be ready to explain any dips.