The Advantages of a Sell-Side Quality of Earnings Report

In the complex world of mergers and acquisitions (M&A), a sell-side Quality of Earnings (QoE) report plays a crucial role in determining a company’s financial health and sustainability of its earnings. Far from being an unnecessary expense or an added complexity, a QoE report is a powerful tool that can provide key insights to both potential sellers and buyers, streamline the transaction process, and help maximize sale value.

Unlike an audit, which provides an opinion on a business’s financial statements based on historical results, a QoE report focuses on the accuracy and sustainability of a business’s earnings. This report typically assesses performance over multiple fiscal year-ends and the most recent interim 12-month period, offering a more current evaluation compared to an audit based on the company’s fiscal year-end.

One of the primary benefits of a QoE report is that it offers an unbiased and independent view of a company’s true sustainable earnings. This is achieved by analyzing the company’s historical revenue, earnings, and adjusted EBITDA (Earnings Before Interest, Tax, Depreciation, and Amortization). By normalizing revenues and expenses that are either non-recurring or unrelated to normal operations, a QoE report helps assess the true cash flows of a company. As enterprise value is frequently calculated based on a multiple of revenues or adjusted EBITDA, EBITDA adjustments identified in the QoE process can have a an exponential effect on a company’s selling price.

Additionally, QoE reports offer flexibility. Tailored based on a seller’s specific needs, they can carve out necessary financial information related to a specific division if only a part of the business is up for sale. This enables potential buyers to focus on division-specific results and earnings, thereby providing a more accurate picture of that division’s financial health.

A QoE report also offers a comprehensive trend analysis, focusing on the factors that increase or decrease revenues, costs, and the company’s overall gross profit. In addition, a sell-side QoE report identifies potential problem areas before a company goes to market, allowing time for management to make necessary corrective actions. Identifying and rectifying potential issues, such as inconsistent accounting policies or unrecorded liabilities, can significantly enhance the potential transaction value and make for a much smoother sale process.

Performing a working capital analysis is another crucial benefit of a QoE report. A proper level of working capital is essential for the new owner to operate the business normally without requiring additional investment. Most sellers are not well equipped to analyze and discuss working capital without a QoE or sell-side diligence team.

Further, a QoE report helps identify concentrations of risk, which could stem from significant customer relationships, major vendors, or key employees. Understanding these risks is vital for both the seller and the buyer, helping them make informed decisions.

In conclusion, a sell-side QoE report offers a wealth of information that goes well beyond regular accounting rules. It provides a more detailed and accurate financial picture, helping sellers and buyers navigate the complex M&A process with confidence. By proactively obtaining a QoE report, sellers can better position their businesses for a sale, while buyers can evaluate the financial health of their potential acquisition, making the report a win-win for both parties involved in an M&A transaction.

About GreerWalker LLP

GreerWalker LLP provides tax, accounting, and advisory services focused on the needs of privately-held middle-market companies and their owners throughout the US and around the globe.

Our affiliate GreerWalker Corporate Finance LLC offers exit planning and merger and acquisition services to provide a complete, integrated solution for middle market companies and their owners.

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About the Author

Ted is a senior manager in our business assurance practice. He specializes in serving clients in the manufacturing and distribution industry and has experience with companies in industries such as business and professional services, technology, and healthcare.

Ted also has significant experience in financial due diligence and transaction advisory services. From buy-side quality of earnings, to sell-side consulting, to post acquisition services, Ted utilizes his experience to help clients identify and minimize risk.

For questions and guidance about these changes, reach out to Ted at ted.smoyer@greerwalker.com or (704) 816-7015.

The information contained herein is general in nature and based on authoritative guidance that is subject to change. Neither GreerWalker LLP nor GreerWalker Corporate Finance LLC (collectively, “GreerWalker”) guarantee the accuracy or completeness of any information and are not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. GreerWalker assumes no obligation to inform the reader of any changes in tax laws, regulations, accounting standards, or other factors that could affect information contained herein. This publication does not, and is not intended to provide legal, tax or accounting advice, and readers should consult their advisors concerning the application of tax laws or accounting guidance to their particular situation. Any tax analysis in this publication is not advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer.