Home Services Quality of Earnings: SDE-to-EBITDA Bridge

What a home-services QoE should answer

The useful output is a bridge from seller records to a reproducible earnings base. For an owner-operated company, Seller's Discretionary Earnings may help describe one working owner's economic benefit. EBITDA is different: it should reflect the cost of the management and labor required under the buyer's model. Neither measure is cash flow, purchase price or value by itself.

A disciplined review answers five questions: Did the revenue occur? Was it earned in the stated period? What did it cost to deliver? Which adjustments are nonrecurring and provable? What cash, fleet and working-capital investment is required to maintain the result?

Build a source-of-truth hierarchy

Revenue testing by service line

Separate demand that behaves differently: repair calls, replacements, projects, maintenance agreements, subcontracted work, public works and insurance restoration. Reconcile monthly invoiced revenue to the general ledger, then to cash or receivables. Investigate deposits in transit, credit-card batching, customer deposits, unbilled work, refunds and owner-collected payments.

Cutoff matters most around month-end and year-end. A deposit for future work is not automatically earned revenue. A large project may require job-level analysis of work performed, amounts billed, retainage and expected cost to complete. The purpose is not to impose one accounting method; it is to make the method visible and consistent.

Rebuild gross profit before debating add-backs

Normalize direct labor classification, payroll taxes, subcontractors, materials, permits, disposal, merchant fees and warranty/callback labor. Compare gross margin by service line and month. If the company moved costs between cost of sales and operating expense, recast history consistently before drawing conclusions.

For fleet-heavy businesses, fuel and repair trends should be connected to vehicle count, mileage and deferred replacement. A higher reported EBITDA can be economically worse if it was created by postponing maintenance or capital expenditures.

A worked SDE-to-EBITDA bridge

Every bridge line needs a description, period, amount, general-ledger reference, supporting document, recurrence assessment, buyer replacement assumption and reviewer conclusion. Never include the same economic adjustment twice—for example, adding back all owner compensation and then also adding back personal expenses already included in that compensation account.

Adjustment evidence standard

• Accepted: documented, nonoperating or nonrecurring, and not required under the buyer's operating model.
• Adjusted: partly supportable but requires replacement cost, normalization or allocation.
• Rejected: recurring, undocumented, necessary to produce revenue, or speculative future savings.
• Buyer-specific synergy: analyzed separately from stand-alone earnings; it is not seller EBITDA.

Working capital and cash conversion

Calculate monthly receivables, inventory, customer deposits, payables, accrued payroll, sales tax and deferred service obligations on a consistent basis. A target working-capital mechanism should follow the transaction structure and the company's actual seasonal cycle. Review aging quality, not merely the total balance. Old receivables, uncollectible insurance claims and vendor balances under dispute can distort the apparent peg.

Minimum analytical checks

1. Tax-return revenue to annual P&L.
2. Monthly ledger revenue to CRM/invoice detail.
3. Cash receipts to bank and merchant records.
4. Payroll expense to payroll filings and technician roster.
5. Add-backs to invoice, payroll or ledger evidence.
6. Gross profit by service line and month.
7. EBITDA to operating cash flow after working-capital movement and recurring fleet needs.
8. Current trailing period to comparable prior-year months, not only the preceding months.

What the final deliverable should contain

Use an executive summary, source reconciliation, monthly earnings bridge, adjustment register, revenue-quality analysis, gross-margin analysis, working-capital schedule, fleet/capital-expenditure review, customer and technician concentration, open questions and a clear limitations section. The linked workbook provides a formula-driven starting point; it is not a substitute for CPA diligence or a valuation opinion.

High-information analytical procedures

Monthly and job-level analysis should be selected to answer a hypothesis. If gross margin rose, test price, mix, technician utilization, material cost and cost classification. If trailing revenue accelerated, test jobs, calls, conversion, average ticket, weather, marketing and acquisitions. If payroll declined, determine whether capacity improved or open positions and owner labor created an understated run rate.

Owner replacement should be function based

List the seller's weekly hours in general management, estimating, sales, technical supervision, dispatch escalation, recruiting, purchasing, finance and key accounts. Determine which tasks disappear, which transfer to existing employees with compensation changes, and which require new hires or third parties. Include payroll taxes, benefits, vehicle and recruiting cost where appropriate. A single “manager salary” assumption can be wrong in both directions when the seller performs several skilled roles.

Cash conversion bridge

After normalized EBITDA, show cash taxes or owner distributions only for the intended analysis, cash interest and principal for financing, working-capital investment, recurring fleet replacement and other maintenance capital. Do not call EBITDA free cash flow. For seasonal companies, model monthly cash rather than dividing an annual number by twelve. Customer deposits and annual memberships can create favorable cash timing while leaving future service obligations.

Sample selection and limitations

Document whether procedures cover the full population or a sample. Select large, unusual, period-end and random items; include negative invoices and credits. State data gaps, management representations not independently tested and any inability to reconcile systems. A limitation should change the conclusion or confidence, not disappear into an appendix.

Translate findings into the transaction

QoE findings can affect price, structure, working-capital definitions, escrows, seller notes, earnouts, representations and closing conditions. The accounting conclusion does not dictate the remedy. A buyer may accept a known one-time issue at the agreed price; a seller may cure a reporting gap before closing. Keep the evidence, earnings conclusion and negotiated response in separate columns so reviewers do not confuse analysis with advocacy.

Primary sources and review notes