Quality of Earnings Report

A Quality of Earnings Report is a standard component of the due diligence process for private acquisitions. Net income is not always the most accurate indication of financial performance for a business. There are many key details that are not outlined in a company’s income statements. A Q of E Report assesses how a company accumulates its revenues – such as cash or non-cash,
recurring or nonrecurring. It reveals unique or unusual factors that characterize the business, that may not be apparent in a standard review of its financial statements.

A Q of E Report helps potential buyers believe in the story of
the business, and it enables potential sellers to offer a third party
validation of the business’ status. This will make any
potential buyer or seller more confident in their transaction.

A Quality of Earnings Report will present financials the
way buyers think about them. This process helps eliminate
misunderstandings or miscommunications related to
accounting interpretations.

AVOID LENGTHY PRICE NEGOTIATIONS
Most private equity buyers use debt to fund transactions, which
drives the purchase price. But lenders will not issue final term
sheets without the seller supporting his offer with a Q of E
study. Proactive preparation of a Quality of Earnings Report helps ensure that valuations presented in letters of intent are more precise and accurate.

The ability to offer a prepared Quality of Earnings Report increases the speed and likelihood of closing. Quality of Earnings studies typically take around 30 days. Completing this concurrently with your due diligence may eliminate delays following the tender of a letter of intent.
Remember, “time kills all deals.” Every day that a deal remains static is a day of lost opportunity.