Due Diligence and Transaction Advisory in New Jersey

What a quality of earnings report is, and how it differs from an audit

An audit asks whether financial statements are fairly presented under accounting standards. It looks backward and it answers to a standard. A quality of earnings analysis asks a different question entirely: how much of the reported profit is real, repeatable, and likely to still be there after the business changes hands.

That distinction matters because most small and mid-sized businesses being bought and sold have never been audited. The seller has tax returns and a bookkeeping file. Neither was built to answer a buyer's question, and neither is wrong exactly. They were simply produced for a different purpose.

A quality of earnings engagement rebuilds earnings the way an acquirer needs to see them. It separates what the business earns from what the owner chose to run through it, it tests whether profit converts to cash, and it identifies the revenue that will not repeat under new ownership.

What goes into a quality of earnings report

The work is less about recalculating and more about interrogating. In practice an engagement covers:

• Normalized earnings. Adjusting reported profit for owner compensation above or below market, personal expenses, one-time items, and related party arrangements that will not survive the sale.
• Revenue quality. Customer concentration, contract versus repeat versus one-off work, pricing changes, and whether recent growth is durable or a single unusual year.
• Cash conversion. Whether reported profit actually turned into cash, and where it went if it did not.
• Working capital. Establishing a normal level, which matters because the target set at closing moves real money between the parties.
• Cost structure. Which costs are fixed, which scale with revenue, and which the seller has been personally absorbing.
• Tax exposure. Positions that could transfer to the buyer, covered in more detail below.
• Proof of numbers. Tying the financial file back to bank statements, payroll records and filings, because a schedule that cannot be traced to source is an assertion rather than evidence.

Who can perform one

There is no license that says "quality of earnings". The work is performed by CPAs and transaction advisory teams, and the relevant question is not the credential but whether the person doing it has sat on the deal side before.

Both of our partners spent years at Big Four firms and then at global consulting firms working with private equity clients on buy side and sell side due diligence, financial modeling and deal structuring. That is a different discipline from preparing a tax return well, and it is the discipline this work needs. You can read more on our about page.

What drives the cost

We do not publish a fixed price, because the honest answer is that the work scales with the mess. Two businesses with identical revenue can require very different engagements.

The factors that move it: how many legal entities are involved, whether the books are on accrual or cash basis, how clean the separation is between business and personal spending, how many states the business operates in, whether inventory or work in progress needs to be verified, and how much time the deal timeline allows. A business with one entity, clean accrual books and a single state is a straightforward engagement. A business with three entities, cash basis records and personal property running through the payroll is not.

What we will do on a first call is tell you which of those apply to you, so the number is not a surprise.

Buying a business: what buy side diligence covers

If you are acquiring, you are usually working against a signed letter of intent with an exclusivity clock. The purpose of diligence is not to find a reason to walk away. It is to know exactly what you are buying so the price and the agreement reflect it.

Beyond the earnings analysis, buy side work covers the liabilities that follow the business rather than the seller. Worker classification is the one we see most often: a business that has treated long-term workers as contractors carries an exposure that does not disappear at closing. Sales tax registration in states where the business has created nexus is close behind, and unfiled or incorrectly filed returns are common in owner operated companies that grew faster than their back office.

This is also where buyers using SBA 7(a) financing have an additional constraint, because the lender has its own requirements for the financial information it will accept, and those requirements have their own timeline.

Selling: preparing the financials before a buyer sees them

Sellers usually come to us in one of two states. Either an approach has already been made and the clock is running, or they are twelve to twenty-four months out and want to be ready. The second is a much better position.

The number agreed in a letter of intent is not the number that gets paid. Between the two sits diligence, where a buyer proposes adjustments against earnings, sets the working capital target, and challenges the add backs. Every one of those is a negotiation you are stronger in when your numbers were built to withstand it rather than assembled under deadline.

Sell side preparation means building the earnings picture the way a buyer will build it, so you see the adjustments before they do, and resolving the exposures that would otherwise become price reductions or escrow holdbacks. Our transaction readiness checklist sets out what buyers ask for first.

The tax exposures that surface most often

Diligence findings are rarely exotic. The same handful account for most of what gets discovered:

• Worker classification. Contractors who function as employees.
• State nexus. Sales or income tax obligations created in states where the business never registered, often through remote employees or online sales.
• Sales tax on services. Taxability varies by state and is frequently applied incorrectly.
• Owner compensation. S corporation owners taking distributions instead of reasonable salary.
• Accrual and cutoff. Revenue or expenses recorded in the wrong period, which changes the earnings a buyer is paying a multiple on.
• Related party arrangements. Rent paid to an entity the owner controls, at a rate that will not continue.

None of these are unusual. All of them are cheaper to fix before a buyer finds them.

Deal structure: asset sale or stock sale

How a transaction is structured changes the tax outcome for both sides, and it is one of the few decisions that is genuinely difficult to unwind afterwards.

Buyers generally prefer an asset purchase, because it steps up the basis of the assets acquired and limits the liabilities that come along. Sellers generally prefer a stock sale, for the opposite reasons. In an asset deal both parties must agree how the purchase price is allocated across asset classes and report it consistently on Form 8594, and that allocation drives real tax consequences for each side.

The treatment of a business sale is not a single calculation. It depends on entity type, holding period, how much of the price is allocated to goodwill, and whether any portion is deferred or contingent. Getting a CPA involved before the letter of intent is signed is worth considerably more than getting one involved after.

One New Jersey rule that catches people

New Jersey requires the purchaser in most bulk sales of business assets to notify the Division of Taxation in advance, using the C-9600 bulk sale notification, and to escrow funds against the seller's outstanding state tax liabilities until the state releases them.

A buyer who does not file it can become responsible for the seller's unpaid New Jersey taxes. It is a filing with a deadline attached to a closing date, and it is one of the most common ways an otherwise clean transaction runs into trouble in this state. It is also a reason to have advisors who work in New Jersey regularly rather than treating the deal as generic.

Sectors where diligence looks different

The mechanics are consistent but the risk concentrates in different places depending on what the business does. The areas we are asked about most:

• Construction and contracting. Work in progress is usually the single largest judgment on the balance sheet, and it is where earnings can be overstated without anyone intending it. Retainage, change order treatment and percentage of completion assumptions all get tested.
• Real estate. Entity structure, depreciation history and whether the seller has been treated as an investor or a dealer, which changes the tax character of the proceeds.
• Cannabis. Section 280E disallows ordinary deductions, so cost of goods accounting is the whole game, and historical positions taken by the seller transfer their risk to the buyer.
• Restaurants and hospitality. Cash handling, tip reporting and payroll compliance, plus lease terms that often carry more value or risk than the operating business itself.
• Professional services. Customer concentration and whether the relationships belong to the business or to the departing owner. This is the finding most likely to change a valuation.

Where the target has an ongoing finance function that needs rebuilding after close, that work continues as a fractional CFO engagement, which is often the natural next step once the transaction completes.

What you actually receive

A diligence engagement should end with documents you can hand to other people, not a conversation you have to summarize. Depending on scope, the deliverables are:

• A normalized earnings schedule. Reported profit bridged to adjusted earnings, with every adjustment listed, quantified and supported, so a buyer or lender can follow the reasoning rather than take it on trust.
• A working capital analysis. A defensible normal level and the monthly detail behind it, which is what the target in the purchase agreement should be negotiated against.
• A findings summary. Issues ranked by whether they affect price, require an indemnity in the agreement, or simply need fixing after close. Your attorney works from this directly.
• A tax exposure schedule. Each position identified, the years at risk, and an estimate of magnitude where one can be supported.
• A data book. The supporting files organized so the next party who asks does not restart the process from the beginning.

On sell side engagements the same material serves a second purpose. It becomes the package you provide to buyers, which shortens their diligence and reduces the number of surprises that turn into price adjustments.

Working alongside your other advisors

A transaction usually involves an attorney, sometimes a broker or investment banker, a lender, and us. The financial and tax workstream is ours, and it feeds the others. The attorney needs to know which exposures require specific indemnities. The lender needs financial information in a form it will accept. The broker needs the earnings story to be defensible.

We are used to working inside that group rather than around it, and we would rather coordinate directly with your attorney than have questions relayed through you while a clock is running.

Where we work

We are based at 185 Linden St #201 in Hackensack, New Jersey, and we work on transactions throughout Bergen County and northern New Jersey, in New York City, and with buyers and sellers across the United States. Deal work is well suited to remote delivery, and the New Jersey specifics above are a good illustration of why local knowledge still matters on a local transaction.

The firm is licensed in New York, license 133101, and New Jersey, license 20CC04335100.

Common questions

Do I need a quality of earnings report if the business is small?

Not always. Below a certain deal size the cost is hard to justify, and a more limited scope focused on the two or three areas that actually carry risk is often the better answer. We will tell you when that is the case rather than selling the full engagement by default.

How long does diligence take?

It depends far more on how quickly information arrives than on our side of the work. When records are organized and the seller is responsive, a focused engagement moves quickly. When records have to be reconstructed, that becomes the timeline.

Can you work with my attorney and my lender?

Yes, and it works better that way. We would rather speak to your attorney directly about which findings need to be reflected in the agreement than have it passed along secondhand.

We are already under a letter of intent. Is it too late?

No, and this is a common starting point. Tell us the exclusivity date on the first call, because the sequence of work changes when there is a deadline attached.

Do you only work on New Jersey transactions?

No. We are a New Jersey firm and a good deal of our work is local, but we advise buyers and sellers nationally. Multi state operations and the state tax questions that come with them are routine for us.

What happens first?

A conversation, at no cost, about the transaction and what stage it is at. If the scope you need is smaller than a full engagement, we will say so. You can get in touch here or call us on (201) 343-1621.