Matter & Substance
  May 2, 2024

Quality of Earnings (QoE) Report: Pre-Sale Due Diligence

Quality of Earnings reports—commonly referred to as QoE—act as a critical tool in pre-sale due diligence, providing comprehensive analysis of a company's financial performance and risks. Generally, these reports look past accounting processes that are often used to hide poor sales and risk, going beyond GAAP principles to assess a business’s worth. Whether you're looking to buy or sell a business, the insights gained from a professional QoE report can assist in making informed decisions and navigate the transaction with confidence.

What Is a Quality of Earnings Report?

A QoE report is a third-party comprehensive assessment of a company's earnings and financial performance, typically prepared by an accounting or advisory firm. With this analysis in hand, buyers and sellers can ascertain the price being paid in a transaction is fair.

Because net income doesn’t provide a full picture of a business’s financial performance, a QoE report focuses on the sustainability and accuracy of a business’s earnings as well as its operational efficiency. Unlike traditional financial statements, which provide a historical snapshot of a company's financial position, a QoE report determines a business’s true net income with reliable and relevant metrics.

In order to complete a QoE report, the chosen firm will need to review details from financials, bank statements, ledgers, customer lists, and any other relevant data. With a completed report, the amount of revenue a company produces, the accuracy of its financials, the consistency of revenue will all be assessed.

Quality of Earnings Report vs Audit

While both a Quality of Earnings (QoE) report and an audit provide insights into a company's financial performance, they serve different purposes. An audit focuses on verifying the accuracy and completeness of financial statements based on Generally Accepted Accounting Principles (GAAP). Although items may be “correct” in GAAP procedures, these issues and adjustments may cause a skewed understanding of a company’s financial health. In contrast, a QoE report goes beyond the numbers to assess the quality and sustainability of earnings, identifying underlying factors that may impact future cash flows and profitability.

Benefits of a Quality Earnings Report

Due diligence is essential to the buying and selling process. With a QoE in hand, transactions are strengthened in many ways, including:

  1. Identifying Financial Risks

    A QoE report helps uncover potential financial risks and anomalies, such as irregularities in revenue recognition or unsustainable cost structures. By isolating these one-off events, the extent of a business’s financial risks will become much clearer.

  2. Improving Decision-Making

    By providing a clear understanding of a company's financial performance and risks, a QoE report empowers stakeholders to make informed decisions regarding business transactions, investments, and strategic initiatives.

  3. Enhancing Due Diligence Processes

    In a sale, the speed of the transaction is important to both buyer and seller. QoE reports streamline the due diligence process by providing comprehensive insights into a company's financial health, facilitating smoother negotiations and transactions.

  4. Assessing Business Performance

    QoE reports offer valuable insights into a company's operational efficiency, profitability drivers, and growth potential, helping stakeholders assess overall business performance and identify areas for improvement.

What Is Included in a Quality of Earnings Report?

The creation of QoE reports is a nuanced process that varies from firm to firm, as it involves the consideration of various factors, including client requirements, industry dynamics, regulatory considerations, and the firm's expertise and methodologies. As a result, different firms may produce QoE reports that vary in content, depth, and focus. However, when receiving a QoE report, buyers or sellers should expect:

  • An Executive Summary, which highlights the business’s market, location, offerings, customer base, and any other basic information

  • Breakdown of revenue by categories and customers

  • Income statement analysis

  • Debt analysis

  • Working capital analysis

  • Summary of EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization)

  • Adjustments for capital expenditures

  • Examination of tax filing positions and reporting

Quality of Earnings Report Cost

Because of the difference in business’s size, record-keeping, and complexities, the cost of a QoE report varies greatly. Additionally, the more experienced the firm you choose is, the more likely you’ll incur higher fees—and more accurate work. Generally, QoE reports are priced based on hourly rates or fixed fees negotiated between the client and the consulting firm, with the typical report costing $20,000 to $30,000.

Contact Mowery & Schoenfeld for a Quality of Earnings Report

At Mowery & Schoenfeld, we specialize in providing comprehensive Quality of Earnings (QoE) reports to help businesses navigate transactions with confidence. Our experienced team of financial experts conducts thorough analyses to uncover insights that drive informed decision-making and mitigate risks. Contact us today to learn more about how we can assist you with your QoE reporting needs and schedule a consultation.

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