What is a Sell-side Quality of Earnings Report?

One of the most significant career events for a business owner is selling his or her company. The stakes are high, and a financial payout is on the line. That is where a sell-side Quality of Earnings report (also referred to as a QoE report) comes in. Not only will it convey key information to buyers, but it can also help preserve value, increase the certainty of closing, decrease the time to close, and reduce surprises in the process.

Let’s take a closer look at how this vital step in the financial due diligence process can create value and help pave the way toward a smoother transaction.

What’s a QoE Report?

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

Although it’s not mandatory for a buyer or a seller to obtain a QoE report, it can be an extremely valuable tool to help improve the chances of a successful close and ensure a fair transaction price for both parties.

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

The Value of a Sell-Side QoE Report

It’s not unusual for companies contemplating a sale to obtain a sell-side QoE report. This helps the seller understand how potential buyers might gauge the business’s financial health, spot problems that could potentially derail a transaction, and take corrective action to preserve or possibly increase the company’s value.

As the name suggests, a QoE report focuses on the “quality” or sustainability of a company’s earnings. A key metric in most merger and acquisition transactions is normalized EBITDA (earnings before interest, taxes, depreciation, and amortization). A QoE report starts with a company’s EBITDA, strips out unusual or nonrecurring revenues and expenses, adjusts owners’ compensation and related party transactions to reflect market rates, and identifies overstated or understated assets and liabilities.

Although any Quality of Earnings report can be customized to meet the seller’s needs, some other areas of focus may include:

  • Working capital and equipment needs
  • Key assumptions used in management forecasts
  • Information on technology, talent, client and vendor relationships, lease commitments, etc.

Enlisting the help of a professional to conduct a thorough sell-side QoE analysis can reduce the likelihood of having a deal fall apart or closing a deal with a final transaction price that is lower than the seller expected.

Take a deeper dive into the value of a Quality of Earnings report, and learn about the key benefits of a buy-side Quality of Earnings report.

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.

Service expansion announcement: Holtzman is becoming Armanino effective January 1, 2022.

By joining together, Holtzman clients will have access to an expanded suite of accounting and consulting offerings to support any stage of company growth. Armanino’s Tax practice, with its deep bench, can provide on-demand expertise on a multitude of issues, including international tax, state and local tax, transfer pricing, R&D tax credits, transaction advisory, provision, estate and trust, partnerships and qualified business income. Learn more in our press release.

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