Why You Need a Quality of Earnings Assessment

This article was created in conjunction with CPAmerica’s April 2022 Newsletter. Quotes throughout directly reference the newsletter article.   With record-setting merger and acquisition (M&A) activity across the middle market, many business owners are considering cashing in and selling their businesses. While financial due diligence is necessary for most deals, a quality of earnings (QOE) assessment helps sellers clearly demonstrate value to buyers.  

“While assurance services (audits, reviews, and compilations) focus on validating historical results, a QOE evaluates an entity’s operating results regarding the sustainability of future earnings, and provides a basis for projecting future operating performance.  

An effective QOE process enhances the understanding of a business by identifying critical success factors, validating the financial track record, assessing the sustainability of profits and cash flow, and normalizing earnings. The process also serves to identify critical risks, confirm and quantify the existence of red flags, and provide feedback on other areas of the transaction’s financial analysis, including financial modeling and valuation.” 

There has been a dramatic increase in requests for M&A services in recent years, “driven by optimistic economic prospects, low-cost debt financing, and pent-up private capital.” In turn, the dramatic increase in transaction activity has expanded the need for QOE assessments to support both buyers and sellers of businesses.    

Aldrich’s transaction services professionals have been working alongside clients and private equity firms to offer QOE services for more than ten years.  

“Investment bankers we work with have said that the majority of businesses are having QOE reports done before even taking the business to market,” said Brian Grant, CPA, Partner.  

Our team of experienced specialists has seen this increase in QOE requests first-hand, especially on the sell-side of the transaction. To continue to meet our clients’ ever-changing needs, we expanded our practice to include a dedicated QOE team. With more hands available to help, we are now prepared to manage all aspects of a business sale transaction.  

 In addition to the transaction service team’s expertise and knowledge, the QOE team draws upon significant resources from their niche practice, including manufacturing, distribution, food and beverage, construction, architects and engineers, agriculture, healthcare, real estate, and utilities.   

Business transitions and transactions often represent a significant portion of sellers’ portfolios. QOE ensures buyers understand the total value and can help you achieve your financial goals. If you’re interested in learning more about if a QOE is right for your business, or if you know someone who could benefit from an assessment, contact Jon Bowdoin.