Quality of Earnings Reports – Three Frequently Asked Questions

Apr 11, 2019

IBA, as the premier business brokerage firm in the Pacific Northwest, is firmly established as a respected professional service firm in the legal, accounting, banking, mergers & acquisitions, real estate, and financial planning communities.  Periodically, we will post guest blogs from professionals with knowledge to share for the good of owners of privately held companies & family owned businesses.  The following blog has been provided by Hillary Parker of Clark Nuber PS (www.clarknuber.com)

Quality of Earnings Reports – Three Frequently Asked Questions

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.

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.

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

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.

Hillary Parker, CPA, is a Principal at Clark Nuber with a professional focus on audit & assurance.  If you have questions about Quality of Earnings Reports or any area relevant to Ms. Parker’s expertise please contact her at (425) 635-4538 or hparker@clarknuber.com. ©2019 Clark Nuber PS. All rights reserved. Reprinted with permission from Clark Nuber PS.”

IBA, the Pacific Northwest’s premier business brokerage firm since 1975, is available as an information resource to the media, business brokerage, and mergers & acquisitions community on subjects relevant to the purchase & sale of privately held companies and family owned businesses. IBA is recognized as one of the best business brokerage firms in the nation based on its long track record of successfully negotiating “win-win” business sale transactions in environments of full disclosure employing “best practices”.