Back To Resources

6 Reasons to get a Sell-Side Quality of Earnings Report


Selling your business can be a long and often stressful process, leaving many sellers disappointed with their final offer amount. To navigate this journey with greater success and to optimize returns while minimizing headaches, it is imperative for sellers to explore the benefits of obtaining a sell-side Quality of Earnings (QoE) report.


A Quality of Earnings analysis is a comprehensive process typically conducted by a CPA or another financial professional to assess a business's overall health. In this process, they proactively identify potential concerns about the business's financial well-being that could be flagged by a prospective buyer.


This approach allows you, as a seller, to address these concerns preemptively, strategically positioning your business before it enters the market. At Midwest CPA, we advocate for viewing this as an offensive strategy. The alternative is that the buyer finds these issues on their own forcing you to be defensive when issues arise during a buyer's due diligence.


In this article, we will delve into the top ten ways getting a quality of earnings report can pay for itself many times over.


1. Increase Your Sale Price with a Sell-Side Quality of Earnings


When selling a small business, two crucial factors significantly impact the purchase price:

Earnings:
The amount of earnings your company generates is a key determinant, typically measured as Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA). A sell-side quality of earnings analysis presents an opportunity to enhance both the quantity and quality of these earnings.

EBITDA can be increased by identifying adjustments to your financials that a new buyer should not anticipate incurring. This includes one-time expenses or events, personal expenses that the owner ran through the business, or the normalization of recent changes to business operations.

When the buyer is performing due diligence they are going to be looking for adjustments that will favor them. However, they are not going to point out to you adjustments that will be in your favor it's up to you to do that.

Multiple:
The multiple applied to these earnings, often falling within the range of 2-6X for smaller companies, is the second critical factor. Undertaking a sell-side quality of earnings analysis allows you to actively contribute to increasing this multiple. This is done by addressing and mitigating perceived risks associated with buying the business.

During the sell-side QoE process, your provider will identify key risk factors, enabling you to collaboratively work on strategies to either mitigate these risks before entering the market or to proactively address them, positioning your business as an attractive investment.


2. You Know of Issues Before the Buyer


As the seller of a business, you inherently possess a wealth of information about the venture you are offering that the buyer lacks. Why not leverage this advantage to your benefit?

When a buyer initiates their due diligence process and begins uncovering issues, catching you unprepared can immediately place you on the defensive. Taking an offensive approach is far more advantageous. By being proactive in identifying and comprehending any potential concerns a buyer might raise positions you in a stronger negotiating stance. This is precisely what a sell-side Quality of Earnings analysis accomplishes.

By conducting a sell-side QoE analysis, you not only anticipate and understand issues that a buyer may uncover, but the accompanying report also serves as a powerful tool to address these concerns transparently. Effectively, the report functions as a guide, explaining any flagged issues and, in turn, putting the buyer at ease.

It's a psychological advantage€”people are generally less apprehensive about challenges they comprehend compared to those that remain unclear or mysterious. Proactively addressing potential concerns through a sell-side QoE not only enhances transparency but also fosters a sense of confidence and trust during the negotiation process.


3. The Buyer Diligence is Faster


Many small businesses often lack sophisticated accounting processes. Various reasons may explain why the owner has not prioritized this in the past, but one certainty arises€”when the time comes to sell, the buyer is likely to pose numerous questions and request detailed information.

Imagine the advantage of already having all the necessary information meticulously organized and readily available. What if you could accomplish this without the stress of looming deadlines that typically accompany being under contract with a buyer?

This proactive approach not only facilitates a smoother diligence process but also expedites it significantly. By having all the required information readily accessible, you enhance the efficiency of the buyer's due diligence, leading to a faster and more streamlined transaction process.


4. An Expert in Your Corner


The buyer will likely engage an accounting firm specialized in acquisitions to assist with their buy-side financial due diligence. This team is likely to boast extensive experience, having been involved in numerous similar deals. Their expertise positions them well to guide their client through negotiations for the most favorable deal.

Recognizing this, it becomes advantageous for the seller to also enlist an expert to advocate for their position. Having a knowledgeable professional in your corner provides a strategic advantage during negotiations.

An additional benefit of this approach is that you can rely on your counsel to navigate some of the more challenging discussions in the negotiation process. This not only streamlines the communication but also allows you to maintain a positive relationship with the buyer, enhancing the overall transaction experience.


5. Clarity Around Net Working Capital


Net working capital is often an underestimated aspect when it comes to buying and selling a small business, despite its significant impact on the purchase price. Misunderstandings related to net working capital frequently lead to deal failures late in the process.


A sell-side quality of earnings analysis is a valuable tool for assessing the required amount of net working capital to operate the business. Having this analysis conducted by your own advisor allows you to present the results in a favorable light, shaping the narrative to your advantage.


This approach not only makes your stance on net working capital clear from the outset but also minimizes the likelihood of misunderstandings emerging later in the process. By addressing this crucial aspect upfront, you set the stage for a smoother and more transparent transaction.


6. Option to Delay Going to Market


You may review your sell-side quality of earnings report with your provider and determine together that the business is not yet ready to go to market. This could be because there are too large of red flags that would make the business unattractive to a buyer. Or there may be opportunities available to you that should you correct them you may be able to sell your business for substantially more.

By investing in a sell-side QoE, you gain insights before investing considerable time and effort into the sales process. This preemptive understanding provides a clear perspective on potential obstacles and opportunities, guiding you on the necessary improvements needed to ready the business for a successful sale. Essentially, a sell-side QoE acts as a strategic roadmap, ensuring that your efforts align with maximizing the business's market appeal and value.


Conclusion


In conclusion, the sell-side QoE analysis stands as a crucial asset in the process of selling a business. From uncovering hidden opportunities to addressing potential red flags, this analysis empowers sellers with foresight, streamlining the due diligence process and fostering transparent negotiations.


As M&A specialists, our team at Midwest CPA is very familiar with how to perform a sell-side QoE to get your business sold smoothly and for top dollar.


Contact us for a free consultation, and let's start shaping your path to a successful exit.

View Services


View More Resources



Disclaimer

The content contained in this blog post is intended for general informational purposes only and is not meant to constitute legal, tax, accounting, or investment advice. You should consult a qualified legal or tax professional regarding your specific situation.