This may be one of the most important questions in acquisition due diligence: is the buyer actually acquiring the assets necessary to generate the historical earnings?

Those assets may be physical—equipment, vehicles, inventory, specialized tools, animals, licenses, technology. They may also be intangible—contracts, customer relationships, trade names, software rights, permits, intellectual property, exclusive supplier arrangements.

Historical earnings belong to the business configuration that produced them. If critical revenue-generating assets are excluded from the transaction, the buyer may not be acquiring the same economic enterprise reflected in the historical financial statements. That can have major implications for both Quality of Earnings and business valuation. If a company generated $1 million of cash flow using assets the buyer will not own—or rights the buyer cannot exercise—the historical earnings may have limited relevance to the post-closing business.

Before relying on earnings, ask one fundamental question: what exactly is transferring? The answer may determine whether the buyer is acquiring a going concern—or simply a collection of assets and opportunities.