Does Your Manufacturing Company Need a CFO or a Controller?
This blog was originally written in 2021. It has been updated with new references and resources.
Every M&A transaction is different, but all are complicated. Ultimately, you want to ensure the transaction you are hoping to conclude makes sound financial sense. A Quality of Earnings (QoE) is one way to gain additional comfort over a company's financial statements.
However, a QoE analysis can dive deeper into a business than just the company's financial statements. Through the QoE process, you may be able to gain a greater understanding of the company's management team, initial assessment of internal controls, key performance indicators, and factors that are unusual (one-time events or those that are not sustainable over time).
In an M&A transaction, there are reasons for both the buyer and seller to request a QoE report. The seller wants a deal to go through as quickly as possible, without surprises. The QoE will look at the business through the eyes of potential buyers. This process improves the likelihood of a successful close, maximizes value, and can accelerate the timeline due to getting ahead of matters that buyers may consider key issues.
From a buyer’s perspective, you want a QoE to give you greater confidence your purchase or investment will work out the way you expect it to and validate the earnings you based your offer on. The QoE can help you understand account balances, cash flows, and general operations in better detail.
Identifying red flags in the QoE allows the seller, buyer, or investor to investigate further to learn the cause and, therefore, to adequately evaluate the ramifications.
There are several issues to look for when reviewing the QoE report, regarding both income and expenses. It is important to keep in mind these do not necessarily indicate intentional misrepresentations of information, there could be a reasonable explanation. However, failure to address red flags is critical because any or all of these can call the company’s valuation and future performance into question.
Sellers Seeing Through Buyers’ Eyes
Each of the items listed above may cause a buyer to pause if it comes up in a QoE report. This could delay a deal from going through. On the other hand, a seller who gets a QoE report has the opportunity to dig into any potential issues early on and disclose relevant information during the due diligence phase. M&A advisors, who have experience seeing deals through to close, can be very helpful in explaining information in ways that will minimize the potential impact on a deal’s chance for success.
At Redpath and Company, our M&A advisory team provides ongoing guidance and support from beginning to end, to help protect your interests so you can make well-informed decisions along the way. Want more information on potential red flags to avoid? Click the button below to download the PDF.
This blog was originally written in 2021. It has been updated with new references and resources.
Earlier this month, the U.S. Senate failed to pass The Tax Relief for American Families and Workers Act of 2024 (HR 7024), a $78 billion bipartisan...
Editor's note: This piece was originally published in 2021 and has been updated to include additional resources.