Understanding the quality of earnings and working capital requirements of a business is critical in assessing value in a sale process.
Sell-side or buy-side quality of earnings (Q of E) is a part of financial due diligence that involves the analysis of an organization’s financial information by an independent party. This is a necessary step during the transaction process because it helps assess the continuity of cash flows and working capitals, which is a key consideration for how a third party will value a business.
The Q of E report highlights the key aspects of the business for a specified historical period.
These key aspects include:
- Normalized level of EBITDA and the addbacks to bridge from reported EBITDA to adjusted EBITDA
- Fluctuations in annual and monthly financial information
- Revenue and gross margin by product, customer or distribution segments
- Operating expenses and employee analysis
- Key balance sheet highlights
- Normalized levels of working capital needed to operate the business
- Cash Flow
Choosing a Third Party to help With Your Quality of Earnings
Whether you know it or not, you have been preparing for a sale for years. Understanding your value prior to going to market gives the seller bargaining power. It can also help keep the deal on track and on time by identifying pitfalls well in advance. One of the best places to start with the sale of your business is by hiring a third-party vendor to provide you with sell side Q of E report.
Before soliciting offers, sellers should seek to have a Q of E report prepared to identify anything that might be discovered in the buyer’s Q of E report or due diligence. Knowing that in advance, enables the seller to make the decision on how to address anything uncovered before going to market.
When you work with NorthBridge, you’ll be working with Certified Public Accountants with transaction advisory experience.
When choosing a provider, it’s important to ask questions beyond cost, such as their experience, their transparency during the engagement, the quality of their product, the intended timeline for their process and more.