Quality of Earnings Report

Thinking About Buying or Selling or Investing in a Business?

HLA has a team of professionals dedicated to Quality of Earnings Reports to support business sales and acquisition deals. Our experience includes service and trade industries as well as the intricacies specific to Government Contractors.

What is the Quality of Earnings Report?

A quality of earnings report (also referred to as a QofE report) is a vital part of due diligence when selling, buying or investing in a business. If you’re selling the business, it is referred to as a sell-side quality of earnings report. If you’re buying or investing, it’s a buy-side quality of earnings report. The difference has more to do with who’s requesting the report and why than it does with the report’s analysis and contents.

Sell-side Quality of Earnings Report

Investing in a credible QofE report can significantly help a company’s marketability, valuation, and the likelihood it will sell, all while shortening the overall process through negotiation and due diligence.

With your numbers adjusted and verified in a QofE report, you could discover that what looked good to you using your own bookkeeping methods might fall short of buyer expectations and industry norms. As a seller, it’s better to have that information early on. You may decide to make changes before your business goes to the market. If not, we can help present that story proactively to buyers.

When a credible third-party firm has evaluated and vetted your numbers, you can go into the deal feeling more confident that the numbers presented in an LOI will be the numbers at the closing table.

Buy-side Quality of Earnings Report

Relying on the historical and prospective financial statements without a thorough understanding of the underlying data, assumptions, contingencies and other key variables could be disastrous. 

As the potential buyer or investor in a business or lender/financial institution, you need a level of assurance that future earnings will be adequate to support the purchase price and related debt service. 

As part of your due diligence process, it’s invaluable to have an independent buy-side report that drills down into the account balances, cash flows, and operations of the business.  A QofE report provides a more detailed and representative picture of just how well the business is really doing and whether it is worth the price under consideration. For example, it evaluates such things as the recurring nature and quality of its operations and cash flows, as well as the underlying assets and liabilities of the business.

What You Can Expect of a Quality of Earnings Report

Many of the procedures and analyses performed fall into the following broad categories:

• Understanding of General Financial and Accounting Policies
• Analysis of Key Business Drivers
• Sales, concentrations and backlog analysis
• Adjusted Earnings Calculations
• Analysis of Debt Service
• Future Projection of Earnings and Cash Needs
• Review of cash accounts
• Any Other Areas of Interest to the Buyer (for example, verification of specific accounts)