Car wash quality of earnings tests whether reported profit is supported, repeatable, and relevant to the ownership case being purchased. Reviewers reconcile cash and sales, examine membership timing, test adjustments, and assess working capital and omitted costs. Agree on the scope first, then connect material findings to the acquisition model and transaction documents.
- Define the entities, periods, procedures, and intended users of the engagement.
- Reconcile underlying collections before treating reported sales as supported earnings.
- Examine recurring costs and replacement duties alongside positive adjustments.
- Carry findings into capital needs, working capital, financing, and the agreement.
The 1031 exchange guide and cost segregation exit guide explain separate property and tax analyses. Keep those conclusions outside the historical earnings bridge, while reconciling the final transaction assumptions across all advisor workstreams.
What should the engagement question and scope establish?
Ask whether the records support the cash-generating business the buyer expects to own. Define the assets and operating plan so the earnings review fits the purchase and includes work the seller currently does without pay.
Quality of earnings is a financial review of reported earnings, their support and their relevance to a defined deal. The engagement scope determines which procedures the reviewer performs.
The valuation hub places this review beside pricing and structure. The Yale School of Management acquisition-diligence discussion treats proof of cash and earnings as parts of a broader review. Its search-fund context provides background. It is not a car-wash lending rule.
List the entities, sites and periods covered. State the accounting basis, approach to material items, available records, procedures and deliverables. Ask how missing information is handled and what remains unresolved. Record who may rely on the work and which balance-sheet or working-capital questions are included.
Distinguish this assignment from other professional work. Do not call a limited consulting review an audit. Do not promise an assurance opinion the engagement does not provide. Buyers, sellers and lenders need to know what was actually tested.
Agree on the update process. A longer deal timeline may call for review of more recent results. An old report can miss a closure, repair, price change or member-payment problem. Those changes may matter to the final decision.
How should cash collections and memberships be reconciled?
Trace operating collections from the payment systems through settlements and bank activity, then reconcile them to the accounts. Identify retail, membership, cash and fleet collections, refunds, fees and timing differences, excluding nonoperating transfers from wash revenue.
Match periods and keep source reports. A settlement just after month-end may explain a difference, but it needs a dated bridge. Similar deposit and revenue totals are not enough. Deposits may include owner transfers or loan proceeds.
State what each unresolved difference means for the review. It may require more evidence, a revised revenue conclusion or a report limitation. Unexplained deposits are not automatically sales, and differences are not automatically wrongdoing. The P&L reading guide explains the starting point.
Review billings, collections, failed charges, refunds, pauses and promotions. Check how prepaid or deferred amounts are treated. Obtain the system’s status definitions. Registered accounts, paying accounts and visits can count different groups.
Compare groups of accounts with the cash records. A promotion can add accounts before enough renewals exist to assess whether they will stay. A price increase may raise billings while changing cancellations. Separate observed results from forecast assumptions.
Use the Membership Revenue Bridge to keep reconciliations separate. A member visit uses service but is not automatically another retail sale. Investigate a model that adds an assumed ticket for those visits to actual recurring collections.
Which adjustments deserve particular scrutiny?
Test each adjustment against ledger evidence and the post-sale operating case, including owner duties, personal transactions, repair history and occupancy structure. Document the rationale and any continuing replacement cost.
The car wash add-back guide separates supported expense reversals from replacement duties. The bridge should allow decreases as well as increases. A missing historical cost may still be necessary for the buyer. Its absence does not prove the work can be removed.
Keep planned growth and buyer efficiencies outside the historical bridge unless a separate pro forma case is explicitly presented. Label that case and show its costs and timing. Include dependencies and uncertainty. A forecast benefit does not prove that past expenses were misstated.
Assume a fictional statement shows $220,000 of EBITDA. Review identifies $15,000 of unsupported revenue included in that amount, a documented $10,000 transaction-specific expense proposed for removal, and $30,000 of replacement-management cost missing from the historical accounts. The teaching bridge is $220,000 − $15,000 + $10,000 − $30,000 = $185,000.
These figures are invented, not a transaction or industry benchmark. Test each amount and avoid duplicate adjustments. Capital spending, loan payments, taxes and working-capital changes remain separate cash needs. The earnings calculation does not replace those schedules.
How can expense timing distort the result?
Review unpaid invoices, accruals, prepaid costs, inventory movement and classifications, distinguishing chemical purchases from consumption. A year-end delivery or delayed repair payment can change period comparisons without changing consumption or eliminating the obligation.
Check costs paid by related entities or the owner personally. Shared bookkeeping, insurance, utilities, management and service may need a supported split. A site’s results can look stronger because another entity pays a necessary bill. Trace that cost before accepting the margin.
Compare monthly trends before accepting the annual result. Explain changes in open days, staffing, prices, repairs and cost splits. A better margin in one month may reflect timing or reclassification. It does not by itself prove a lasting cost reduction.
Keep a dated cutoff schedule for material items. Show the service period, invoice date and payment date, and ask which period bears the cost. Match the treatment across the earnings bridge and closing balance sheet. Do not omit the obligation or count it twice.
What belongs in working-capital review?
Specify which assets and liabilities transfer and how the agreement defines the working-capital calculation. Review relevant receivables, inventory, prepaid items, payables, accruals and customer obligations under the actual business structure rather than assuming one standard basket fits every wash.
Separate operating balances from debt-like items under the negotiated definitions. Financing, unpaid capital work or a transaction expense may need distinct treatment. The report can explain the economics. Counsel and transaction advisers address the agreement’s classification.
The IRS business-sale guidance explains separate-asset treatment and allocation. It does not define this deal’s working-capital target. Connect tax allocation, adjusted earnings and price adjustments. Keep their different calculations and purposes clear.
| Finding | Evidence path | Model question |
|---|---|---|
| Revenue mismatch | POS to settlements to bank to accounts | What collections are supported? |
| Missing management cost | Owner duties to replacement plan | What labor continues? |
| Unpaid repair | Service order to invoice to payable | Who funds the obligation? |
| Shared occupancy | Entity records to property agreement | Which rent basis fits the acquisition? |
How should the findings reach the closing decision?
Deliver a report and bridge that distinguish supported conclusions, estimates and limits. For each material finding, show the evidence, amount, affected ownership assumption and next step for authorized reviewers.
- Reconcile the report’s scope with the assets and entities being purchased.
- Update the acquisition model using documented earnings conclusions.
- Carry capital, working-capital, and debt-like items into their separate schedules.
- Review agreement treatment and financing implications with the relevant advisors.
- Refresh material information before making the final completion decision.
The SBA 7(a) overview identifies ownership changes as an eligible use and directs applicants to lenders for deal-specific documents. It does not say every QoE report or adjustment meets a financing requirement. Ask the actual lender which review applies. Keep the evidence supporting the final underwriting case.
Assign unresolved findings to a reviewer and evidence deadline. Show whether the final model uses a supported conclusion, labeled estimate or unresolved assumption. Retain the report version used for financing and closing.