Do you need to do a QoE audit?

August 08, 2024

by a searcher from Temple University - The Fox School of Business in Philadelphia, PA, USA

I am a self funded searcher making a partial acquisition into a franchised business and would become the 3rd partner. I have looked at 3 years of the financials (balance sheet, P&L, and GL) as well as tax returns but am basing my valuation primarily on the adjusted P&L. This would make a 4.5x (I know it's high) valuation of $2.5m. Aside from having a hold harmless clauses for previous debts/liabilities, is there really a need to have a QoE done for a business of this size?

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Reply by a professional
from The College of New Jersey in La Verne, CA 91750, USA

^redacted‌ thanks for the tag. I think it's really up to your risk tolerance. Generally a good idea to get one done for any business where you are unsure about the reliability of the financial statements. That being said, franchised businesses usually have to report their financial performance to the franchisor. The franchisor collects a royalty on certain income streams so it's in their best interest to have accurate financial reporting from the franchisee. However, deal pricing vs. how the franchisor looks at economics may be different. So again, probably a good idea to spend the money and gain peace of mind.

Reply by an investor
from Ivey Business School at Western University in Boca Raton, FL, USA

Best practice is to do a QoE and your lender may require it. If cash and accrual accounting yield materially different P&L results then the accounting is complicated and QoE is more important. That said, it's possible to prudently avoid one if you get all the bank statements and you can tie the revenues and expenses to the statements, or most of them. Additionally, if they use an industry CRM and cc processor, and they are willing to give you read-only access to those third-party websites, you may be able to confirm the revenues, and perhaps also the expenses, using another third-party source and spot check various invoices for legitimacy.

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