Understanding the quality of earnings and working capital requirements of a business is critical in assessing value in a sale process.
A sell-side or buy-side Quality of Earnings Report (Q of E) is a part of financial due diligence that involves the analysis of an organization’s financial information by a third party. This is a necessary step during the transaction process because it helps assess the continuity of cash flow and working capital, which is a key consideration for how a third party will value a business.
The Q of E report highlights the key aspects of the business for a specified historical period.
These key aspects include:
Normalized level of EBITDA and the addbacks to bridge from reported EBITDA to adjusted EBITDA
Fluctuations in annual and monthly financial information
Revenue and gross margin by product, customer or distribution segments
Operating expenses and employee analysis
Key balance sheet highlights
Normalized levels of working capital needed to operate the business
Cash Flow
Choosing a Third Party to help With Your Quality of Earnings
Whether you know it or not, you have been preparing for a sale for years. Understanding your value prior to going to market gives the seller bargaining power. It can also help keep the deal on track and on time by identifying pitfalls well in advance. One of the best places to start with the sale of your business is by hiring a third-party vendor to provide you with sell side Q of E report.
Before soliciting offers, sellers should seek to have a Q of E report prepared to identify anything that might be discovered in the buyer’s Q of E report or due diligence. Knowing that in advance, enables the seller to make the decision on how to address anything uncovered before going to market.
NorthBridge can perform both sell side and buy side Quality of Earnings engagements. In addition to our M&A Advisory experience, you will be working with a Certified Public Accountant familiar with analyzing companies and looking at the “numbers behind the numbers”.