Selling Your Company

Quality of earnings, net debt, the working capital peg and the data room.

Reference Notes

Quality of earnings analysis in a sale or acquisition, buy-side and sell-side QoE

A quality of earnings report is an analysis of whether reported earnings are sustainable: it normalizes EBITDA for non-recurring items, owner compensation and run-rate changes, tests revenue by customer and by period, and examines working capital and debt-like items. A buyer commissions its own from its diligence advisers, and a seller increasingly commissions a sell-side analysis before going to market, from accountants or advisers it engages; neither is an audit and neither gives an opinion, and a buyer weighs a sell-side report by who prepared it and tests it with its own. Either way the company being sold decides how long the work takes and what it finds by having reconciled books, tied schedules and answers ready. Every week a buyer spends checking whether the numbers are real is leverage the seller does not get back.

Source: Practice; prepared by diligence advisers a buyer or a seller engagesLast revised September 2026General information, not advice

Net debt, debt-like items and the working capital peg

A deal priced on a cash-free, debt-free basis adjusts the price for net debt at closing, and the argument is over what counts as debt-like: deferred revenue, accrued bonuses, unpaid taxes, customer deposits, unfunded obligations and finance leases are the usual candidates. Since ASC 842 there is no deferred rent line any more, and operating lease liabilities are argued over but usually left out. The working capital peg sets a normal level of net working capital, and the price moves if the closing balance is above or below it. Both are set from the trailing months' balance sheets, so the seller's own history is the evidence.

Source: Practice; the purchase agreement governsLast revised September 2026General information, not advice

Data room preparation and the diligence request list

A data room is organized by the questions a buyer will ask rather than by where the documents were kept: statements and trial balances by period, ledger detail, agings, reconciliations, contracts, leases, debt agreements, tax filings, payroll, the cap table and board minutes, each filed under the request it answers. Everything in it should reconcile to the same trial balance, because a buyer's first test is whether two documents agree. The first request list is followed by a second, and the March numbers get asked for again in June.

Source: PracticeLast revised September 2026General information, not advice

Buying or selling a company: business combination versus asset acquisition, asset sale versus stock sale, earnouts, purchase price allocation

Whether an acquisition is a business combination is an accounting test, not a question of legal form: a set of assets is not a business when substantially all of the fair value of the gross assets acquired sits in one identifiable asset or a group of similar ones, and otherwise it is a business only if it includes at least an input and a substantive process (ASC 805-10-55-3A onward). A business combination is measured at fair value, recognizes goodwill and expenses the transaction costs; an asset acquisition allocates its cost over the assets on relative fair values, recognizes no goodwill and capitalizes the transaction costs (ASC 805-50). An earnout in a business combination is contingent consideration recognized at fair value on the acquisition date, and one classified as a liability is remeasured through earnings until it settles, unless it is really pay for a seller who stays on, which is compensation. An asset sale and a stock sale are legal and tax structures that change who keeps the liabilities and how the seller is taxed, either can be a business combination for the buyer, and the structure is decided with counsel and a tax adviser.

Source: FASB ASC 805 (805-10-55-3A onward; 805-30); ASC 805-50 (asset acquisitions)Last revised September 2026General information, not advice

Study

Test Yourself

A few questions on Selling Your Company, drawn from the notes on this page, to check what stuck.

The assistant writes these questions from the reference notes on this page each time you ask. A generated question or answer can be wrong: check it against the standard the explanation names. General information, not advice.

Read this once

How to Read These Notes

General information, not advice.

A note is about accounting in general. It is not advice about your situation and it is not an engagement. When a number matters — a filing, a covenant, a sale — put it to a person.

Each note names its source.

Read the standard it cites before you act on it. “Last revised” is the month the note was last written or corrected against that source.

A question these notes do not answer.

The assistant answers accounting questions in plain language. Ask About Selling Your Company →

A note answers a general question. Your books answer the specific one — the first conversation is a look at them and an honest answer about whether we are the right firm.

Start a Conversation Estimate an Engagement