Quality of Earnings is not only about expenses. Sometimes the greater risk is on the revenue side of the income statement.

Consider two businesses generating identical annual revenue. Business A has hundreds of recurring customers, diversified across industries and geography. Business B generates 45% of its revenue from one customer whose contract expires six months after closing. Same revenue, very different risk.

A meaningful Quality of Earnings analysis should therefore consider more than historical totals. It should look at customer concentration, recurring versus project-based revenue, contractual relationships, revenue trends, unusual spikes or declines, dependence on the selling owner, pricing changes, and revenue that may not transfer with the business. These factors can materially affect the sustainability of earnings even when the historical financial statements appear strong.

For acquisition lending, the question is not simply “What did the company earn?” It is also “What produced those earnings, and how likely is that revenue stream to continue?”

That’s where financial analysis begins to become financial due diligence.

Experience Matters Most.