How a Sell-Side Quality of Earnings Report Strengthens Your Business
By: Allan Tepper, Co-Founder & Senior Manager, and Joe VonEhr, Director.
Imagine this: You’ve spent years building your business, and just as you’re about to finalize the sale of it, your buyer uncovers a financial or operational issue that neither you nor your investment banker even knew existed.
Suddenly your valuation drops, or worse, the deal is off the table.
This scenario happens more often than you think—and it’s devastating when it does.
But what if you could avoid these last-minute surprises, protect your business’s worth, and ensure you get top dollar for your sale?
This is where a sell-side Quality of Earnings (QoE) report can help.
For sellers, a QoE report is more than just a financial document. It’s a safeguard you can put in place to help ensure the sale of your business is as seamless and successful as possible, and one that will protect you against the most common pitfalls, including:
- • Unforeseen Financial Liabilities: Many business owners don’t realize the importance of potential risks underlying their financials—things like overreliance on a small group of customers, tax non-compliance, or one-time revenue sources.
- • Unrealistic Valuation Expectations: Many sellers think they know the value of their business, but without properly “normalizing” earnings, they may be in for a rude awakening when buyers offer far less.
- • Slow or Disorganized Processes: Nothing kills a transaction’s momentum like slow, disorganized data. If your financial records and business data aren’t in order, you could face months of delays, frustrating you and the buyer.
A sell-side Quality of Earnings report can address these common issues, streamlining the process of transitioning your business for a smoother, more efficient, and financially rewarding outcome. Unlike a buy-side QoE, which focuses on uncovering risks for the buyer after a Letter of Intent is signed, a sell-side QoE is one that comes into play before the business hits the market, allowing the seller to identify possible pitfalls early, with enough time to resolve them and position the company more favorably in the market.
Here’s how:
What is a Quality of Earnings (QoE) Report?
A Quality of Earnings (QoE) report is a comprehensive, third-party review of your business’s financial health, focusing on the sustainability and quality of your earnings.
While audits verify the accuracy of financial statements, QoE reporting goes deeper. It examines the actual quality of those earnings by benchmarking and analyzing trends. It also “normalizes” your performance by identifying non-recurring, one-time expenses and eliminating any owner-specific costs or financial anomalies.
A QoE provides a transparent picture of your business’s financials, ensuring there are no surprises for the buyers—or for you. It is a dress rehearsal for due diligence.
Here are the key deal-focused financial metrics that a QoE report covers:
- • Adjusted EBITDA: This is a critical measure buyers use to assess the value of your business. A QoE normalizes EBITDA by accounting for one-time, personal, and non-operating expenses.
- • Working Capital: Every transaction requires a certain level of working capital to be delivered. A QoE ensures this figure is analyzed and normalized, considering seasonal fluctuations and non-recurring changes.
- • Debt-Like Items: Items like deferred compensation, tax liabilities, or unpaid bonuses can significantly impact the purchase price of your business. A QoE identifies these liabilities early.
Why a Sell-Side QoE is Essential
Selling your business isn’t just about finding a buyer—it’s about maximizing the value of what you’ve built. A sell-side QoE is your best tool for ensuring that you get the most out of your sale.
Here’s why:
- Uncover and Resolve Issues Early A QoE report allows you to identify potential deal-killing issues before they arise during the buyer’s due diligence. Whether it’s a customer concentration issue, tax complications, holes in your management team, capacity issues, or inaccurate financial reporting, the earlier these problems are identified, the more time you have to correct them or frame the narrative around them. This proactive approach makes your business more attractive to buyers and increases the chances of closing the deal.
- Set Realistic Valuation Expectations One of the most complex parts of selling your business is setting a fair price. Many sellers overestimate their business’s worth, leading to failed negotiations. A QoE gives you a clear, objective view of your company’s financials and helps set realistic valuation expectations. By normalizing your earnings, you avoid over-inflating your business’s value, which could deter potential buyers.
- Speed Up the Sale Process A drawn-out sale process is one of the biggest frustrations for both sellers and buyers. “Time kills all deals,” as the saying goes. A sell-side QoE can streamline the entire transaction process by organizing your financial and operating data and presenting a clear, detailed picture of your business’s health. This makes it easier for buyers to trust your numbers for a faster closing.
- Maximize Purchase Price Did you know that well-supported “add-backs” identified during a QoE can significantly increase your business’s valuation? Each dollar added to your EBITDA can result in a multiplier effect, increasing the final purchase price by 6x, 8x, or even 10x the adjusted EBITDA. A QoE ensures that these valuable add-backs are well-documented and presented to buyers, potentially boosting your bottom line.
The Emotional Impact: Protecting What You’ve Built
Selling a business is a financial transaction. It’s also deeply personal.
You’ve poured countless hours, energy, and heart into growing your company: months, years, maybe decades. The stakes are high, and the process can feel daunting.
But with a sell-side QoE, you can regain control.
You confidently enter negotiations, knowing that your business’s value is well-supported. You avoid last-minute surprises, knowing you’ve taken every precaution to ensure a smooth, successful sale.
At CFO Consulting Partners, we understand the complexities and emotions behind selling a business. Our seasoned team of former and interim CFOs and CPAs works closely with you to uncover potential issues, maximize your valuation, and ensure that your hard work is rewarded.
Unlike large firms that send junior associates to handle the work, our team brings decades of experience directly to the table. We’ve been in your shoes, and we know what it takes to get a deal done.
Are you ready to sell your business with confidence? To get started on a customized sell-side Quality of Earnings report and make sure you get the value your company deserves, contact us here or contact Allan Tepper at 646.650.2028 x701 or Joe Von Ehr at 203.349.2076 x710.