The decision of whether or not to conduct a Quality of Earnings analysis can significantly affect the success of a transaction for buyers and sellers. The purpose of a Quality of Earnings analysis is to minimize any unexpected developments that could occur with the proposed transaction and to maximize transaction value.
When it comes to buying or selling a business, a Quality of Earnings analysis will help ensure the integrity of financial and non-financial information.
Buy-side due diligence helps buyers uncover an accurate valuation of a target company, have confidence and clarity about their business opportunity, and aid a smooth transition process post-closing.
When it’s time to sell your business, a comprehensive sell-side due diligence can help sellers get an accurate understanding of their Company’s value, reduce the concerns of the buyer, and minimize surprises that can threaten a successful deal.
Three key beneficial considerations of a quality of earnings report include:
1. Identify Issues that affect value
Buyers and sellers alike can benefit when issues that affect value are accounted for ahead of a transaction. A Quality of Earnings Analysis can help buyers and sellers identify accounting, operational and other issues that can result in earnings adjustments. This helps reduce risks for buyers and sellers as they approach a transaction.
2. Confidence in earnings sustainability
A common concern of buyers in a business transaction is earnings sustainability. Buyers need to know if their target earnings are the result of one or two big years or if they are sustainable in the future. Earnings sustainability is a major factor that will determine a buyer’s return on investment. Sellers can use a Quality of Earnings analysis to account for and communicate earnings opportunities that have not yet been fully realized, increasing the value of their business in the eyes of a buyer.
3. More successful acquisitions
Buyers and sellers that conduct financial due diligence usually find a smoother process before and after closing on their transaction. A Quality of Earnings analysis helps buyers make informed decisions to ensure they are acquiring a valuable asset. For sellers, having a Quality of Earnings analysis prepared can increase buyer confidence and increase credibility throughout the process. A Quality of Earnings analysis can also help with integration planning as opportunities for operational improvements are identified ahead of time, rather than after the fact.
Here are some additional benefits of having a quality of earnings report:
- Identify areas of improvement in your company’s operations.
By understanding the factors that are driving your company’s earnings quality, you can identify areas where you can make changes to improve your profitability. - Negotiate better terms with lenders and investors.
When you have a quality of earnings report, you can demonstrate to lenders and investors that your company is financially sound and that your earnings are sustainable. This can give you more negotiating power when you are seeking financing or investment.
Trust Schneider Downs for Quality of Earnings Assessments
At Schneider Downs, our experienced professionals specialize in providing comprehensive quality of earnings (QofE) and due diligence assessments for mergers, acquisitions and divestitures. With our swift, precise, and discreet approach, we help buyers, sellers, investors, private equity firms, and lenders make informed decisions with confidence. Our due diligence process goes beyond just financial factors. We have the expertise to assess potential risks in areas such as tax, operational, information technology (IT), and cybersecurity to help prevent lost value in the deal. Our thorough assessment helps identify potential risks and provides recommendations for risk mitigation, ensuring a smooth and successful transaction. When it comes to quality of earnings assessments, you need a trusted partner with the expertise and experience to provide accurate and comprehensive assessments. Schneider Downs has a proven track record of assisting buyers, sellers, investors, private equity firms, and lenders in evaluating the financial integrity of businesses involved in M&A transactions. For more information, visit the Transaction Advisory Services page.
