What is a Buy-side Quality of Earnings Report?

A Quality of Earnings report (also referred to as a QoE report) is a vital step of financial due diligence when selling, buying, or investing in a business.

A Quality of Earnings report provides potential buyers or investors with more information about a company’s financial condition than can be gleaned from an audit report or traditional financial statements. Financial statements tend to focus on historical numbers and can include nonrecurring revenues and expenses, overly aggressive accounting policies, related party transactions, and other items that cloud the target’s actual value. However, a QoE report is focused on the forward-looking performance of the business and its ability to generate cash flow now and in the future.

Put simply, a QoE reports a company’s expected earnings before interest, taxes, and depreciation (EBITDA) on a prospective basis under a new owner.

The Value of a Buy-Side QoE Report

When buying or investing in a business, obtaining a copy of the target company’s audited financial statements is a good first step in the financial due diligence process, but audited financial statements don’t tell the whole story and are not always available. Even a company with high net income and significant assets on the balance sheet can have cash flow problems and other issues that might not be visible at the surface level. As part of your financial due diligence process, it is vital to have an independent buy-side report that takes a deep dive into the account balances, cash flows, and operations of the business.

A buy-side QoE report helps you to substantiate the business’s value now, and in the future, so you can uncover those issues and prevent buyer’s remorse.

A buy-side QoE report can be customized to meet the buyer’s needs, but it typically includes several items, including:

  • Revenue broken down by product or service line or by customer
  • Analysis of revenue and expense trends
  • Segregation of one-time and nonrecurring revenues and expenses
  • Identification of inaccurate or inconsistent application of accounting policies and procedures
  • Issues related to the valuation of inventory and fixed assets
  • Key assumptions used in management forecasts

From the perspective of a potential buyer, relying on the financial statements without an in-depth understanding of the assumptions and activity of the target could be disastrous. Buyers should have a QoE engagement performed as soon as they execute a letter of intent because the information included in the report can help inform the rest of the due diligence process.

See this related article for a deeper dive into the value of a Quality of Earnings report in an M&A transaction.

How Holtzman Can Help

In today’s competitive M&A environment, it’s crucial to identify and resolve deal-breakers at an early stage. With diverse experience across many industries, Holtzman has earned a sterling reputation for delivering both audits and Quality of Earnings reports (QoEs) to help our clients achieve their goals and strengthen business value. With clients ranging from startups and middle-market leaders to large multinational conglomerates, we dedicate ourselves to delivering stellar results for our clients. Learn more about our Advisory Services.

What’s the difference between QoE reports and audits? Here’s a helpful summary.

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