By Brandon Fredericks, CPA and Randy Misch, CPA
The Quality of Earnings (QofE) component of the due diligence process is often overlooked, but that oversight could cost you money—or worse, the deal. So, where is the value in QofE? What makes a QofE “best in class”? Our experience in M&As helped us craft our Seven Secrets to explaining the benefits of the QofE process.
- It’s a QofE, not an audit – Where a traditional audit focuses on balances and prior transactions, a QofE is focused on the economic earning power on a go-forward basis to maximize the dollar.
- Defining “quality” in QofE – Not all earnings are created equal. Identifying those opportunities that will generate the most significant return well after the deal is closed should always be the target.
- Laser focus on earning capabilities – Sound expertise will allow focus on how the earnings are being realized and whether they are in line with accepted practices.
- Working capital is worth a look – Though it is sometimes overlooked (or not part of the scope), best in practice QofE rules would highly encourage scrutinization of the working capital.
- Keen eye on adjustments – Any deal is bound to have adjustments—due diligence, buyer, seller, and pro forma adjustments. Allowing the QofE team to evaluate this independently can bring some peace of mind to a sometimes confusing and complex process.
- Robust risk evaluation – Professionals with a sound understanding of financial statements and the risk they present to their respective companies, their stakeholders, and their industries can bring a value-added layer to QofE.
- Custom-built procedures – The advantage of QofE is no two QofE are alike. The goal is to assess whether the specialized procedures would provide the needed level of value for the deal to close.
Apple Growth Partners takes pride in learning of the needs and issues of every deal. Contact our experienced M&A team to help your deal with an unmatched value proposition.