A financial quality of earnings review establishes that the earnings were real. This establishes whether they survive the note.
An acquisition financed through SBA 7(a) typically amortizes over ten years, and the buyer signs personally. Financial diligence examines three years backward. Legal diligence examines the entity as it stands today. Neither workstream looks in the direction the debt runs.
That gap was tolerable when the operating environment of a service business changed slowly. It is not tolerable now. The question of which revenue is durable has become a technology question, and it is being asked by no one on a conventional deal team.
The assessment works by revenue line rather than by business. A company is rarely uniformly exposed — it usually has one or two lines carrying most of the risk and several that are effectively insulated.
Task substitutability. What share of billed work is cognitive, remotely deliverable, and requires no credential. That fraction is the exposure.
The physical and regulatory floor. What share requires a licensed, bonded, or insured person on site. This is the durable portion, and in many trades and field-service businesses it is most of the revenue.
Intermediation exposure. Whether the business sits between two parties who could transact directly once matching becomes cheap. A great many companies described as service businesses are actually brokerage, and brokerage is where displacement has moved fastest.
Second-order exposure. Whether the customers are being displaced. A bookkeeping firm serving small professional practices carries its own exposure and its clients' as well. This compounds quietly and almost never appears in a diligence file.
Switching cost and contract term. What actually holds the customer, and for how long.
The output is a band with the mechanism named. A lender or an investment committee needs a stated cause, not a score.
Sellers have begun presenting automation and AI as value drivers. Asking prices reflect it. Verification does not currently exist anywhere in the process.
Each claim made during the sale is traced to a supporting contract and to observable behavior. Four questions resolve most of them:
Is the capability real, or a manual process with a technology label on it.
Does it transfer at close, or is it licensed to the owner personally.
Does the buyer receive the data — customer history, records, the accumulated asset — or only the software.
Is it a differentiator, or a category standard being charged for as though it were one.
The finding runs both directions. A business described as having no systems, but running disciplined manual process with complete records, is not a risk. It is a documented improvement thesis with a knowable cost and a knowable payback, and it belongs in the price conversation.
The operating stack is reviewed for what breaks at close.
Change-of-control and assignment provisions in operational software. These are read by no one in a conventional process — legal diligence covers customer contracts and the lease, not the dispatch platform — and they reprice.
Account, domain, and administrative control, including who holds it today and whether that person is staying.
Custom development and whether it was ever assigned. Internal tools built by a contractor or a family member frequently carry no IP assignment, which means the seller may not own what is being sold.
Vendor concentration, renewal exposure, and data portability.
A written report, structured for the reader who needs it — your own decision, an investment committee, or a lender's credit file.
Revenue defensibility by line, banded, with mechanisms named.
Capability verification: each claim, its supporting evidence, and the delta between what was represented and what exists.
Transfer and continuity risk, with the specific provisions and dependencies identified.
Remediation cost for the first twelve months — priced, sequenced, and separated into what must be resolved before close and what can follow.
Where access was requested and not provided, that is stated plainly along with the risk that could not be assessed and a recommendation on whether it belongs in closing conditions. Gaps are not filled by inference.
The sprint is scoped to complete inside a standard exclusivity period, and requests are submitted in the first week — the seller is slow, the clock is short, and this is the third workstream in the queue behind financial and legal.
A preliminary external read requires no cooperation from the seller and can be completed before an LOI is signed. It is the appropriate first step when the question is whether a target is worth pursuing at all.
Where exclusivity is unusually tight, the scope compresses to risk assessment only, with remediation pricing deferred.
External Read — $1,500 · 2–3 days · no seller access required Suitable pre-LOI or while screening. Externally observable posture, public record, and a preliminary defensibility read.
Technology Quality of Earnings Sprint — $8,000–15,000 · 2–3 weeks The full assessment. Sized against deal complexity and the number of revenue lines, not against transaction value.
For context, this is ordinarily the least expensive workstream on the deal and it addresses the longest-duration risk in it.
TransactionDiligence is the transaction practice of Layer8 Tech Group, founded on thirty years in enterprise infrastructure and engineering leadership, including a cloud engineering organization of twenty-four at a national healthcare payer, and senior technology leadership in mortgage and financial services. The firm continues to serve as fractional CIO to companies in regulated industries.
The firm is also an active buyer, running its own search for a lower-middle-market service business. This assessment exists because it was built for that diligence first. The questions it asks are the ones that have to be answered before signing, which is a different standard than a report written to be delivered.
Schedule a discovery call. If you're under LOI with a clock running, say so when you book and scheduling will be prioritized accordingly.