March 25, 2019

Last year, I wrote an article about the activity around quality of earnings (QoE) reports for M&A activity. To recap, a QoE report is a detailed analysis of all the components of a company’s earnings and the degree to which both cash and non-cash earnings, based on measurement and estimates, are subject to change. They are often prepared by independent third-party firms, such as a CPA firm, as part of due diligence in an acquisition. The one thing a QoE report is not, is an audit. There are no definitive criteria by which to guide the performance of, or reporting on, quality of earnings.

In my previous article, I covered a couple of questions that come up around a QoE report. And, though a QoE report seems fairly straightforward, there are other common questions that pop up. Following are a few of the basic ones.

1. Why is QoE important?

Keep in mind who the requestors of QoE reports often are – a buyer’s board of directors. They want to know if they are buying a mid-range sedan that will have reliable future maintenance or a foreign luxury car where you can expect high mechanic bills. Both might be great cars, but you want to know how much uncertainty is involved with the future maintenance.

There’s an upside for sellers as well. The QoE can provide you the opportunity to tell your story in a comprehensive way, enabling sellers to open a competitive sales process when going to market.

2. What is included in a QoE?

A QoE report typically includes a review of EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization). This is often used as a basis for determining the value of privately held companies. It might also report on the following:

  • The components of working capital
  • Concentrations and risks associated with customer and supplier relationships
  • Operating cash-flow analysis
  • Trend and seasonality analysis

3. How much does a QoE report cost?

The scope of each QoE project is unique, and the cost of the resulting report is as well. It is definitely not a “template” type of engagement where one size fits all. The cost varies significantly based on the scope of the procedures. Significant time is needed up front to adequately determine the needs of the users and an understanding of the transaction and scope of work expectations.

There is a clear benefit to investing in a QoE report – it can help you to sell your company and shorten deal timeline by avoiding future price negotiations. If you have questions about QoE or would like to schedule a discussion about commissioning a report, please contact Hillary Parker.

© Clark Nuber PS and Developing News, 2019. Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited. Excerpts and links may be used, provided that full and clear credit is given to Clark Nuber PS and Developing News with appropriate and specific direction to the original content.

This article contains general information only and should not be construed as accounting, business, financial, investment, legal, tax, or other professional advice or services. Before making any decision or taking any action, you should engage a qualified professional advisor.