Seller’s Edge: Unlock Top Value with a QoE Report
How Quality of Earnings Reports give Sellers an Edge
When contemplating the sale of a business, sellers often focus on preparing marketing materials and identifying potential buyers. However, the single most impactful strategic step a seller can take to influence the deal’s success and final valuation is undertaking a Quality of Earnings (QoE) assessment before the sale process even begins.
A seller-initiated QoE report provides an independent, clear view of the company’s true, sustainable profitability and cash flow. By taking this proactive step, sellers gain a distinct advantage in navigating the complexities of due diligence and fostering buyer confidence, ultimately maximizing the value achieved.
Why Proactive QoE is a Seller’s Strategy
Investing in a QoE assessment allows sellers to view their financial landscape through the eyes of a potential buyer. This assessment identifies and quantifies the quality of the company’s earnings, highlighting crucial areas that buyers will inevitably scrutinize during their due diligence.
Key elements of a proactive QoE assessment include:
Identifying Non-Recurring Items
Quantifying one-time revenue or expenses (add-backs) that are not part of the core, ongoing business, allowing the seller to present a clearer picture of normalized EBITDA.
Analyzing Accounting Policies
Highlighting any aggressive revenue recognition or unusual expense classifications that might raise buyer concern.
Assessing Risk
Scrutinizing potential weaknesses, such as significant customer concentration, to prepare clear explanations and supporting documentation.
“A seller-initiated Quality of Earnings report provides a clear, independent view of the company’s true, sustainable profitability and cash flow, allowing sellers to anticipate buyer concerns, address potential issues proactively, and ultimately maximize the value achieved from the transaction.”
Mitigating Due Diligence Roadblocks and Building Trust
The buyer’s due diligence is designed to uncover hidden risks. A seller-initiated QoE report acts as a powerful tool to anticipate and mitigate potential roadblocks during this critical phase.
By proactively identifying potential issues, sellers gain valuable time to understand their impact, implement corrective measures if necessary, and develop clear rationales. This level of preparedness demonstrates financial sophistication and signals to potential buyers that the business has been well-managed and the seller is serious about the transaction.
Presenting the Findings
Transparency and clarity are paramount when sharing the QoE findings. Sellers should be prepared to walk buyers through the key adjustments made to reported earnings and provide a clear rationale for each. By presenting an objective assessment in a well-organized, easily digestible format, sellers instill confidence and build credibility. This proactive disclosure can preemptively answer many of the buyer’s questions, fostering a more efficient and positive negotiation environment.
Driving Value and Accelerating the Transaction
Ultimately, a well-supported, seller-initiated QoE report accelerates the transaction and increases the potential final deal value.
| Benefit | Impact on the Sale Process |
|---|---|
| Increased Comfort | Buyers gain greater confidence in their valuation due to the independent verification of earnings. |
| Reduced Risk | Minimizing surprises during due diligence reduces the likelihood of last-minute deal adjustments or price renegotiations. |
| Streamlined Process | The buyer's due diligence is significantly shortened, reducing costs and uncertainty for both parties. |
| Competitive Advantage | In a competitive process, a comprehensive and favorable QoE report attracts more interest and helps secure a higher purchase price. |
By proactively addressing potential concerns and building buyer trust, sellers reduce the risk of protracted negotiations. A clean QoE report gives the seller a distinct advantage, allowing them to shorten the timeline and ultimately achieve a more successful outcome.
Questions?
Mike Kiene brings over two decades of experience to middle-market clients, specializing in quality of earnings, risk management, and due diligence across diverse industries. He works within a wide range of industries, including construction, manufacturing and distribution, and dealerships.