Sell-Side Quality of Earnings Report and 6 Reasons to Get One
Chris Barrett
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
3. The Buyer Diligence is Faster
4. An Expert in Your Corner
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 will determine the net working capital needed to run the business.
6. Option to Delay Going to Market
By investing in a sell-side QoE, you gain insights before investing considerable time and effort into the sales process. A sell-side QoE identifies obstacles and opportunities, guiding improvements to maximize your 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.
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.
