Quality of Earnings Template (QoE, EBITDA Bridge, NWC Peg)

Quality of Earnings Scope and Report: [Target name]

A quality of earnings (QoE) scope and report for buy-side or sell-side financial due diligence: objectives and reliance, periods and perimeter, procedures, the bridge from reported to adjusted EBITDA, normalisation criteria, revenue quality, cost base and standalone costs, normalised net working capital and the peg, net debt and debt-like items, cash conversion, and the price and SPA consequences of each finding. It follows common transaction services practice. IFRS references (IFRS 16, IFRS 18) are by name and effective date only. The worked example continues "Project Heron": Corvid Commerce Group plc (fictional) evaluates Tallow Lane Logistics GmbH (fictional), a bolt-on with an enterprise value of about EUR 22m; every figure is invented and recomputed. Replace every [bracketed] value and every row marked Example. This is a document format, not financial, investment, tax, legal or accounting advice. Obtain the standard or law for the normative text.

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Contents

1. Objectives, users and reliance
2. Periods, perimeter and basis of preparation
3. Procedures and information sources
4. Reported to adjusted EBITDA bridge
5. Normalisation categories and acceptance criteria
6. Revenue quality and customer concentration
7. Cost base, headcount and standalone costs
8. Net working capital and the peg
9. Net debt and debt-like items
10. Cash conversion and capital expenditure
11. Findings, price and SPA implications
12. Traceability
13. Glossary and references
14. Standard and licence note

1. Objectives, users and reliance

The QoE answers five questions for the buyer and its lenders:

1. What is the sustainable, recurring EBITDA of the business on a basis consistent with how the buyer values it?
2. Which items should be deducted from enterprise value as debt or debt-like items to reach the equity price?
3. What level of net working capital is normal, so the price mechanism can compare the completion balance with a fair target (the peg)?
4. How much of EBITDA turns into cash after capital expenditure, lease payments and working capital?
5. Which findings should be handled in the SPA rather than in price?

A QoE is an agreed-upon analysis, not an assurance engagement. The report should say that the work relied on information provided by management and did not verify it to the standard of an audit, and should state the procedures performed so a reader can judge the strength of each conclusion. Where the work is performed by an external firm, the engagement letter sets the reliance terms; this template does not replace it.

2. Periods, perimeter and basis of preparation

Consistency matters more than the choice of basis. If the valuation multiple was derived from peers that report EBITDA after IFRS 16, the lease liabilities belong in net debt; if the multiple is pre-IFRS 16, lease rentals must be deducted from EBITDA instead and lease liabilities left out. State the choice in one sentence here and apply it throughout.

From annual periods beginning on or after 2027-01-01, IFRS 18 Presentation and Disclosure in Financial Statements applies. If the buyer later reports "adjusted EBITDA" in its own public communications, that measure may become a management-defined performance measure with disclosure duties under IFRS 18; agree early with the reporting team whether the deal definitions should match the buyer's reported measure. The IFRS 18 Transition Plan (finance/ifrs-18-transition-plan) covers this.

3. Procedures and information sources

Request IDs refer to the Due Diligence Request List (finance/due-diligence-request-list). Keep that list and this report in step: when a request stays open, the related conclusion here is marked "pending" and the open point is listed in section 11.

4. Reported to adjusted EBITDA bridge

4.1 Summary by period

Margins are adjusted EBITDA divided by adjusted revenue: 1,510 / 8,600 = 17.6%, 1,750 / 9,750 = 17.9% and 1,900 / 10,500 = 18.1% for the LTM. LTM revenue is reduced by 135 for the licence cut-off error (QOE-ADJ-004): 10,635 - 135 = 10,500.

4.2 LTM bridge

Check of the totals: management adds 110 + 280 + 150 + 100 + 20 - 230 = 430, giving 1,950 + 430 = 2,380. Diligence adds 110 + 280 + 150 + 20 = 560 and deducts 70 + 135 + 45 + 360 = 610, a net -50, giving 1,900. The gap of 480 is the sum of the differences column: -70 - 135 - 45 - 100 - 130 = -480.

The diagram groups the diligence adjustments: non-recurring 110 + 150 = 260; carve-out net 280 - 360 = -80; accounting and accruals -70 - 135 - 45 = -250; reclassification +20. Check: 1,950 + 260 - 80 - 250 + 20 = 1,900.

4.3 Items searched for and not adjusted

Search the ledger for items that management did not propose, in both directions. In Project Heron the review found no unrecorded one-off gains, but noted two items left unadjusted on purpose: recurring "one-off" recruitment fees that appear every year (treated as recurring cost), and a customer termination fee of EUR 30k received in FY2025 (outside the LTM, so no LTM effect; excluded from the FY2025 adjusted figure of 1,750).

5. Normalisation categories and acceptance criteria

Two rules prevent most disputes. First, every adjustment is symmetrical: if one-off costs are added back, one-off income is deducted. Second, an item is normalised in EBITDA or treated as a balance sheet item in net debt, never both. For example, the restructuring cost in QOE-ADJ-006 is added back to EBITDA, and the unpaid part of the same restructuring (EUR 90k) is a debt-like item in section 9, because the buyer will pay it after completion. That is not double counting: the first corrects earnings, the second the cash the buyer inherits.

6. Revenue quality and customer concentration

How to read and complete this section:

• Recompute retention from the customer-month data. Define the cohort, the period and the treatment of price changes in a note, because different definitions produce very different figures.
• Test revenue recognition for the main contract types. QOE-ADJ-004 is typical: an annual licence recognised when invoiced, rather than over the service period, inflates revenue in the month of invoice and creates a mismatch with deferred revenue.
• Separate price and volume effects in growth. In the example, the 2026-07-01 price increase lifts LTM revenue by only three months; the pro forma full-year effect was not accepted (QOE-ADJ-007) because churn after a price rise often appears at the next renewal.
• Flag concentration and termination rights to the SPA team and to the integration plan, which must protect those customers from Day 1.

7. Cost base, headcount and standalone costs

Totals: management 75 + 40 + 30 + 25 + 60 = 230; diligence 105 + 60 + 45 + 35 + 115 = 360. The removed group charge is 280 (QOE-ADJ-002), so the net carve-out effect is -80 in the diligence view and +50 in management's view.

Review points:

• Reconcile payroll cost in the income statement to the census multiplied by pay and on-costs; investigate differences above materiality.
• Identify open positions the business must fill. Vacancies reduce LTM cost but are not a lasting saving.
• Separate one-off separation costs (setting up systems, recruiting) from recurring standalone costs. One-off costs go to the integration budget and, if the seller agreed to fund them, to the SPA.
• Note costs that will change because of the buyer's ownership (synergies) separately. A QoE measures the business as it stands; synergies belong in the valuation and the integration plan (finance/m-and-a-integration-100-day-plan), not in adjusted EBITDA.

8. Net working capital and the peg

8.1 Definition

Normalised net working capital includes trade receivables, contract assets, inventory, prepayments, trade payables within terms, operating accruals and deferred revenue. It excludes cash, financial debt, income tax balances, accrued bonuses relating to periods before completion, overdue payables beyond normal terms, restructuring provisions, intercompany balances settled at completion, deal costs, and cash-on-delivery collections held for remittance to merchants together with the matching remittance payable (both in section 9, so the payable is not also counted in trade payables). The excluded items appear in section 9 where they are debt-like. Use the same definition, account by account, in the SPA schedule.

8.2 Composition at 2026-09-30

Check: assets 1,700 + 225 + 275 + 125 = 2,325; liabilities 850 + 320 + 535 = 1,705; normalised 2,325 - 1,705 = 620. Reported 2,325 - 1,000 - 545 - 400 = 380; the normalisation of 240 (150 + 225 - 135) explains the difference.

Carry every EBITDA adjustment that has a balance sheet side into this schedule. QOE-ADJ-004 reduces revenue and increases deferred revenue by the same 135 at 2026-09-30; QOE-ADJ-005 increases the bonus liability, which sits outside working capital, so its 45 appears in DL-001 instead. An adjustment that changes earnings but not the matching balance would overstate working capital and the peg.

Deferred revenue is often argued over. Buyers say it is debt-like because the buyer must deliver the service without receiving more cash; sellers say it is a normal operating balance. In Project Heron it stays in working capital because the peg includes it at its normal level, so a seasonal fall is captured by the peg comparison. Record whichever treatment is agreed and apply it in both the peg and the completion balance.

8.3 Monthly history and peg

The July to September balances include the deferred revenue correction for the unearned licence (165, 150 and 135 at the three month-ends), so the history uses the same definition as section 8.2. The peg is the average of the twelve month-end balances:

The December low (625) reflects annual invoices collected before year end. Completion in early January would compare a low balance with an average peg, so the seller would bear a price reduction it may argue is seasonal. Options are a month-specific peg, an average that weights the completion month, or a locked box mechanism with no completion adjustment. Choose consciously and record the reason.

Price adjustment at completion under a completion accounts mechanism:

Example: completion balance 685 gives 685 - 750 = -65, a EUR 65k reduction in the equity price.

9. Net debt and debt-like items

Check: 270 + 90 + 300 + 150 + 175 + 125 + 100 = 1,210.

How to complete and review this schedule:

• Measure each item at the amount the buyer will actually pay, on the date the price mechanism uses. Under completion accounts that is the completion date, so the schedule here is an estimate that the SPA definition later replaces with actual balances.
• Agree the tax treatment of each item. A pension deficit or a restructuring provision may be tax deductible when paid, and sellers often ask for a net-of-tax deduction; buyers point out that the tax benefit arrives later and may be uncertain.
• Watch the movement in debt-like items before completion. Paying overdue suppliers reduces DL-004 but increases net debt by the same cash amount, which is neutral; releasing a provision without paying it is not neutral and should be tested.
• Under a locked box mechanism, list the same items as at the locked box date and add a list of permitted payments (leakage) between that date and completion.

Items to consider, even if they are zero for your target: factoring and supplier finance balances, customer deposits, deferred income on contracts the buyer must deliver at a loss, litigation provisions, decommissioning and dilapidation obligations, unpaid dividends, shareholder loans, earn-outs, capex that was due and deferred, and government grants repayable on change of control. The Working Capital Review (finance/working-capital-review) covers supplier finance programmes in more depth.

10. Cash conversion and capital expenditure

Check: 1,900 - 455 - 225 - 50 = 1,170; 1,170 / 1,900 = 61.6%. Adjusted EBITDA after lease payments, the closest equivalent to a pre-IFRS 16 measure, is 1,900 - 225 = 1,675.

Split capex into maintenance and growth and compare maintenance capex with depreciation over several years. In the example, maintenance capex of EUR 175k a year sits below depreciation of EUR 260k, which suggests deferred spending; the operations workstream confirmed two conveyor replacements were postponed, a finding passed to the valuation and the integration budget.

11. Findings, price and SPA implications

Check: 22,000 / 1,900 = 11.58x, shown as 11.6x; 19,040 - 65 = 18,975.

11.1 Funding and pro forma covenant test

Lenders and the buyer's board read the QoE to test whether the deal fits the buyer's balance sheet. Show the sources and uses of cash at completion, then recompute the buyer's covenants on a pro forma basis using the facility agreement's own definitions.

Check: 11,000 + 21,600 + 1,200 - 1,450 = 32,350; 32,350 / 19,700 = 1.64x, against 11,000 / 17,800 = 0.62x at 2026-12-31 and 0.17x in the FY2027 budget (finance/annual-budget), which excludes Project Heron and is reset in the integration plan (FIN-010). Leverage stays well inside the 3.00x covenant. Liquidity headroom of EUR 26,850k meets the facility minimum but falls below Corvid's treasury policy minimum of EUR 35,000k (finance/treasury-policy), because the uses leave the group whether they are paid from cash or from the RCF. Example: the board approved a time-limited policy exception to 2027-06-30, when the planned refinancing of the 2028 facilities is to restore headroom; the liquidity plan tracks it monthly. From 2027-06-30 the RCF no longer has more than twelve months to run and drops out of headroom under the policy definition, so the refinancing date is a hard deadline, not a target. Record such an exception explicitly; never let a funding plan breach a policy minimum silently.

12. Traceability

13. Glossary and references

13.1 Glossary

13.2 References

Standard and licence note

Structure aligned with common transaction services practice for quality of earnings work, with references to IFRS 16 and IFRS 18 by name and effective date only; no text from IFRS Standards or from any adviser's methodology is reproduced or paraphrased. IFRS is a trade mark of the IFRS Foundation. The categories, criteria, formulas and worked example are original. Corvid Commerce Group plc, Tallow Lane Logistics GmbH and all figures are fictional. Check the current official versions of the standards and the terms of your engagement before use. This is a document format, not financial, investment, tax, legal or accounting advice. Template licence: MIT.