Quality of earnings for a med spa: what the buyer’s accountant should test

A med spa quality-of-earnings review tests whether reported earnings reconcile to reliable records and can continue under the buyer’s operating plan. Its scope should address collections, revenue timing, providers, products, owner work, adjustments, memberships, and related obligations. Use findings in valuation, financing, and contract decisions while keeping the review’s limitations and other specialist work clear.

What decision should the QoE engagement support?

The buyer needs to know which earnings are reliable, what resources sustain them, and what cash or obligations remain outside the headline profit figure. Set the engagement around the acquisition assumptions, reporting quality, financing, transaction complexity, and material risks. A standard report package may need tailoring.

Quality of earnings is an analysis of the reliability, composition, sustainability, and relevant adjustments of earnings for a defined decision and scope. It should not be treated as an automatic approval of the acquisition. Ask the provider what work is performed, what assurance if any is offered, and what lies outside the engagement.

Identify the intended users and reporting basis. A buyer, lender, investor, and seller may need related but different work. Coordinate access and independence requirements before commissioning a report that another decision-maker cannot use without additional review.

Which source records should be reconciled?

Request monthly statements, balance sheets, general ledgers, tax returns, bank activity, payment settlements, payroll, service exports, inventory, and membership records for the agreed periods. Include current results and comparative periods. Preserve report definitions and original exports.

IRS recordkeeping guidance explains the source-document role in financial records. The QoE reviewer should identify the evidence behind material totals and adjustments, then explain unresolved differences rather than selecting the most favorable report. The quantity of files does not establish the quality of reconciliation.

Review entity and location scope. Clinical revenue, administrative fees, rent, products, payroll, and intercompany charges can reside in different entities. Combined economics and the rights acquired need reconciliation. A buyer should understand which cash flow belongs to the actual purchased interest.

What does cash proof add to the analysis?

Cash proof connects receipts and disbursements with the income statement, tax information, and balance-sheet movement for the defined period. It helps identify timing, missing costs, unusual flows, and differences needing explanation. It is not merely checking that year-end bank cash equals a ledger balance.

Ask the reviewer to distinguish earned revenue from package or membership collections, borrowing, owner contributions, transfers, refunds, taxes, and other cash movements. A deposit total can be real without being current treatment revenue. Similarly, expense payments can relate to another period.

For applicable lender-required QoE work, the reviewed SBA Appendix 15 specifies cash proof across trailing twelve months and the last two fiscal years, with scope adjustment when the business has operated less than two years. Have the lender and provider confirm the current requirement and actual periods rather than assuming one selected month is sufficient.

How should revenue and membership promises be tested?

FASB’s dated revenue-recognition educational Q&A addresses customer-contract and recognition issues; the accountant must apply current authoritative requirements and the actual reporting basis. Test the practice’s contracts and performance rather than relying on software categories or collected cash alone.

Analyze service mix, discounts, refunds, product sales, packages, memberships, and provider-level activity. Reconcile opening obligations, collections, delivery, refunds, and closing balances. Distinguish the accounting measure from the expected future cash needed to fulfill promises.

Review cohorts and recent trends alongside financial recognition. Recurring billing is more persuasive when retention, collection success, contribution, and remaining benefits are visible. The report should describe limits in the data and avoid treating every database enrollment as a currently paying member or every booking as completed revenue.

Which costs and adjustments need a buyer-specific test?

Review provider compensation, product cost, rebates, inventory, rent, marketing, software, professional services, management, related parties, repairs, and owner work. Determine which expenses recur and which roles require replacement. Distinguish accounting corrections, supported unusual items, and changes arising from the buyer’s plan.

The figures are invented. The reviewer should explain the evidence and operating effect behind each real item. An owner’s compensation can be adjusted in one earnings presentation while necessary labor remains in a managed model. A buyer’s projected purchasing savings should not quietly become historical standalone profit.

What should the report say about cash needs beyond EBITDA?

Examine working capital, debt-like items, unpaid expenses, member obligations, device spending, tax balances, and other relevant commitments within the agreed scope. A sustainable earnings measure does not alone establish cash available for acquisition debt or owner distributions.

Coordinate treatment with the purchase agreement. If a membership obligation affects working capital, a separate adjustment, or a reserve, make the interaction explicit. Avoid using the same issue to reduce earnings and price several times without explaining distinct effects.

A technical or clinical reviewer may need to assess equipment condition or care-related concerns, while counsel determines ownership and legal implications. The QoE provider can identify a cost or evidence gap without certifying another specialist’s question. Keep those scope boundaries visible in the decision memorandum.

When does current SBA policy require a QoE?

SBA SOP 50 10 8.1 Appendix 15, reviewed as effective October 1, 2026, requires lender-benefit QoE in addition to valuation for Initial Acquisition and Business Expansion transactions when defined Business Purchase Price is at least $3 million before equity, seller debt, or other financing reductions. It provides distinct treatment for other categories.

The lender must apply the current category, report, vendor, and verification requirements. A buyer-commissioned report may need review by an approved vendor under the policy. A seller-prepared schedule should not be assumed to satisfy the independent lender-benefit requirement.

Even when a particular mandated threshold does not apply, the buyer may still need proportionate financial diligence. Choose scope based on material assumptions and reporting quality rather than concluding that a smaller deal needs no earnings verification. The financing rule and the buyer’s investment judgment serve different purposes.

How should the parties use findings without overstating them?

Classify each finding as verified, estimated, unresolved, or outside scope. Explain its effect on earnings, cash, valuation, financing, or the contract. A received document is not the same as a resolved issue. Assign further work and evidence requirements where material uncertainty remains.

1. Define users, scope, periods, and questions.
2. Reconcile sources and cash.
3. Test revenue, costs, and recurring adjustments.
4. Identify obligations and specialist dependencies.
5. Translate supported findings into the deal model.
6. Document decisions and unresolved conditions.

Use the valuation hub, P&L review, adjustment guide, working-capital guide, and Four-Number Med Spa Valuation Screen for context. The report should make the investment decision clearer, including where the evidence does not support a confident conclusion.

How do you keep the review useful through closing?

Update material financial and operating information as the diligence period moves. Ask the provider what refresh work is needed and which conclusions depend on a particular cutoff. A report about an earlier period may not explain a recent provider departure, campaign, system change, or cash deterioration.

Preserve the final bridge, source references, assumptions, open issues, and agreed contract treatment. Give the buyer an operating baseline that can be compared after closing. If a later number differs, the team should be able to identify whether the cause is performance, timing, accounting, or a changed assumption rather than reconstructing the entire acquisition analysis from memory.

Educational analysis prepared with AI-assisted research for The Med Spa Broker. “Last reviewed” records the source and editorial check date; it does not imply review by an attorney, clinician, or independent appraiser. Read our editorial standards.