$6M Roofing Company — Quality of Earnings and Post-Acquisition Financial Optimization

‍The Challenge

Our client acquired a $6M roofing company and inherited the financial reporting problems that are characteristic of project-based construction and home services businesses. Roofing companies operate in an environment where revenue is earned job-by-job, labor is the largest cost component, demand is seasonal, and cash flow timing is dictated by project milestones, customer payment behavior, and weather. These dynamics make roofing businesses structurally difficult to underwrite from a financial diligence perspective — and structurally easy to misrepresent, whether intentionally or through simple lack of accounting sophistication.

The seller's financial statements reflected several of these problems. Revenue had been recognized inconsistently — in some cases booked at contract signing rather than as work was performed, inflating reported earnings in periods where production had not yet occurred. The balance sheet carried unrecorded liabilities including unpaid employee bonuses, deferred payroll obligations, and vendor payables for materials already received and consumed on jobs. Working capital calculations were unreliable because the underlying accounts receivable and accounts payable balances did not accurately reflect the business's true position at any given point.

For the buyer, these issues created two distinct risks. First, the purchase price was based on earnings that were overstated — meaning the buyer was paying a multiple on phantom profitability. Second, the post-close operating environment would be immediately impaired by cash flow surprises, unplanned liability payments, and an inability to forecast liquidity needs across the seasonal cycle. Without intervention, the buyer would be managing a business with financial statements that did not describe reality.

The client engaged us to conduct a buy-side Quality of Earnings analysis to quantify these risks before finalizing the transaction, and then to build the post-acquisition financial infrastructure needed to operate the business with accurate data and forward-looking cash visibility.

What We Did

The engagement spanned pre-close financial diligence and post-close operational implementation across five workstreams.

Revenue Recognition and Percentage-of-Completion Accounting

Revenue recognition in project-based construction businesses is governed by ASC 606, which requires that revenue be recognized as performance obligations are satisfied — meaning as the roofing work is actually performed, not when the contract is signed or the invoice is sent.

For a roofing company, each job represents a distinct contract with a defined scope, price, and timeline. The appropriate method for recognizing revenue on jobs that span more than a single reporting period is the input method under percentage-of-completion — typically measured using cost-to-cost, where the ratio of costs incurred to date against total estimated costs determines the percentage of revenue that can be recognized.

The seller had not been applying this method consistently. On some jobs, full contract revenue was recognized at the time of contract execution. On others, revenue was recognized upon final invoicing regardless of when the work was performed. The result was a revenue stream that appeared smoother and larger than the business's actual production activity supported.

We recast revenue for the trailing twelve-month period and the look-back period covered by the QoE scope, applying cost-to-cost percentage-of-completion to each job in the backlog. This required reconstructing job cost detail — pulling material receipts, labor hours, and subcontractor invoices by job — and mapping them against contract values and estimated total costs. The recast produced an adjusted revenue figure that was materially lower than reported, which directly informed the purchase price renegotiation.

Post-close, we implemented a job costing system that tracked costs at the individual project level and generated revenue recognition entries based on actual progress. Each job was set up with a budget at inception, costs were coded to the job as they were incurred, and revenue was recognized monthly based on the cost-to-cost ratio. This eliminated the revenue timing distortions that had been embedded in the seller's reporting and gave the client a real-time view of earned versus billed revenue across the active job portfolio.

Liability Identification and Debt-Like Item Adjustments

The balance sheet review uncovered several categories of unrecorded or misclassified liabilities. In roofing and construction businesses, these commonly include accrued payroll obligations (particularly for field crews paid on irregular cycles), unpaid bonuses or commissions, workers' compensation premium adjustments, sales tax liabilities on materials, and vendor payables for materials delivered to job sites but not yet entered into the accounting system.

In this case, we identified unpaid employee bonuses that represented committed obligations of the business, vendor payables for roofing materials that had been received and installed on jobs but had not been recorded as liabilities, and deferred expenses that had been improperly capitalized rather than recognized in the period incurred. Each of these items represented a real economic obligation that the buyer would inherit at closing.

Under standard M&A purchase agreement mechanics, these items are classified as debt-like items — obligations that reduce the effective enterprise value the buyer receives. We quantified each item with supporting documentation, presented the findings to the client's deal counsel, and the items were incorporated into the purchase price adjustment. The net effect was a reduction in the client's closing payment that reflected the true net asset position of the business.

13-Week Cash Flow Model

Roofing businesses face a cash flow timing problem that is more acute than most industries. Revenue is earned over the life of a project, but cash receipts depend on customer payment behavior — which in residential roofing often involves insurance claim proceeds, financing draws, or progress billing milestones that create gaps between when work is performed and when cash arrives. Meanwhile, material suppliers require payment on 30-day terms regardless of when the customer pays, and field labor is paid weekly or biweekly regardless of billing status.

We built a 13-week rolling cash flow forecast organized around the business's actual cash flow drivers: customer collections by job and payment type (insurance, direct pay, financing), material purchases by vendor and payment term, weekly payroll and subcontractor payments, fixed overhead obligations, and debt service. The model was structured to project weekly ending cash balances and identify weeks where cash position would fall below minimum operating thresholds.

The seasonal dimension was critical. Roofing volume in most markets drops significantly during winter months, but fixed costs — rent, insurance, vehicle payments, base payroll for retained crews — continue. The 13-week model allowed the client to see exactly when seasonal cash accumulation needed to begin, how much reserve was required to bridge the low season, and what volume of backlog needed to be in place before committing to crew expansion or equipment purchases during the spring ramp-up.

We established a weekly update cadence — comparing projected versus actual cash flows each week, investigating variances, and rolling the forecast forward. Over time, the model became increasingly accurate as the client refined assumptions about collection timing by customer type and payment method.

Operational SOPs and Financial Process Infrastructure

The seller had been running the business without formal financial processes — a common condition in owner-operated construction companies. There was no defined monthly close calendar, no reconciliation procedures, no standardized accounts receivable follow-up process, and no systematic approach to job cost tracking.

We implemented a full set of operational SOPs covering monthly financial close (defined timeline, task assignments, reconciliation requirements, and management review), accounts receivable management (aging review cadence, collection escalation procedures, and write-off criteria), accounts payable processing (invoice approval workflow, payment scheduling aligned to the cash flow forecast, and vendor statement reconciliation), and payroll processing (time entry verification, prevailing wage compliance where applicable, and workers' compensation classification review).

These processes converted the back office from a reactive function that produced financial data sporadically into a repeatable system that produced accurate monthly financials on a defined schedule.

Vendor and Labor Cost Controls

Labor and materials represent the vast majority of cost of goods sold in a roofing business. We analyzed both categories for optimization opportunities.

On the material side, we reviewed purchasing patterns and identified opportunities to consolidate volume with preferred suppliers in exchange for improved pricing or extended payment terms. Roofing material costs — shingles, underlayment, flashing, fasteners — are commodity-sensitive and vary meaningfully by supplier relationship and order volume. Even modest improvements in material cost per square translate directly to margin improvement across every job.

On the labor side, we analyzed crew productivity by job type, crew composition, and project size. We identified scheduling inefficiencies — jobs where crews were deployed to sites before materials had arrived, or where crew sizes were mismatched to project scope — that were driving labor cost per job above what the estimate had assumed. We worked with operations to implement a scheduling process that aligned crew deployment with material delivery and job readiness, reducing unproductive labor hours.

The Impact

The QoE findings reshaped the transaction economics. Revenue restatement and liability identification produced an adjusted financial picture that was materially different from what the seller had presented, and the purchase price was renegotiated to reflect the business's actual earnings and net asset position. The client avoided overpaying for phantom profitability and inherited liabilities.

Post-close, the 13-week cash flow model gave the client forward visibility into liquidity for the first time. Seasonal cash needs became plannable rather than crisis-driven, and the client was able to meet payroll obligations and fund material purchases without emergency draws on credit facilities. The job costing and revenue recognition system produced accurate earned-revenue data by project, replacing the distorted revenue picture the seller had maintained.

Vendor renegotiations and labor scheduling improvements produced immediate margin gains. Standardized financial processes eliminated the back-office chaos that is typical of post-acquisition construction businesses, giving leadership reliable monthly data and freeing management attention for revenue growth and operational execution. The business is now positioned for expansion — whether through organic growth into adjacent service lines or additional acquisitions — with the financial infrastructure to support scale.

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