There is often more than meets the eye when it comes to the financial statements of small and midsized privately held businesses. If you are considering taking your business to market, you can expect the due diligence stage to include a quality of earnings (QoE) analysis. The following is a primer on this important part of the diligence report.
| 1. What is a QoE analysis? |
Quality of earnings is a measure of risk. A QoE analysis uncovers potential risks a buyer might encounter by analyzing the accuracy and sustainability of the company’s earnings. The study is performed by transaction advisory service professionals typically found in an accounting firm.
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| 2. Why do buyers require a QoE analysis? |
Most buyers of middle-market businesses will require a financial diligence report, with a QoE analysis being the most crucial piece. While financial statements play an important role in M&A transactions, savvy buyers and investors tend to seek out a professionally prepared diligence report. Financial statements offer a snapshot view of a company’s earnings, but there are many reasons why the income shown at a certain point in time might not be sustainable over the long term. A QoE may be needed to provide a clearer picture of revenue stability, future earnings potential, and the free cash flow the business may drive. |