QoE is important however....

searcher profile

March 21, 2023

by a searcher in Redondo Beach, CA, USA

QoE is important. However, paying $25k for a QoE for a business doing $250k-$750k EBITDA or SDE is not always warranted or needed or your only option. Other options or protection methods

1. Hire an accountant to do a high-level overview of financials at a 3rd of the cost, combined with you or a partner doing a thorough financial deep dive.

  1. Bring on an accountant as an investor or advisor, and allocate a portion of equity to them, in return, they do a QoE for "free".

  2. In your LOI, put in a clause where seller has to split costs if they walk.

  3. Get good at financial DD yourself, most of the work is doable, just time-consuming.

  4. Go halfway and do 50% of the work then bring a QoE expert or DD expert to do the rest at half the cost.

  5. Negotiate with your DD QoE expert, tell them you will pay 1/3 up front, and the remainder if the deal closes.

Conclusion: Not saying QoE should be avoided but should be cautiously analyzed from a cost, risk/reward perspective. Think about it, if you do 2 QoE for 2 separate dead deals, you just lost $50k.

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commentor profile
Reply by a professional
from University of Pennsylvania in Washington, DC, USA
I'd like to share a story about a searcher who decided to forgo the QofE when he acquired a $4 million business (his CPA told him that the tax returns were pretty close to the compiled financials, so it wasn't necessary to spend the money on the QofE).

After 4 months of running the business, the new business owner discovered bogus journal entries which inflated the EBITDA by $300k in one year and $200k in another year. These journal entries would have been easily discovered if the business owner spent $6k (at the time) on a QofE.

Instead, the business owner subsequently spent $200k in legal fees suing the seller. Although the business owner didn't have to pay anything further to the seller on the seller note, his 7a acquisition loan was based on the higher EBITDA number and his business couldn't support the debt load.

The business owner no longer has the business, but he cringes in pain when he hears people wrestling about whether they should do a QofE. All of this misfortune could have been avoided by spending around $6k on a QofE. On the other hand, if you'd rather pay $200k after the fact to litigate, I guess I shouldn't complain... after all, I am a lawyer and its good for business :(

BTW, this business owner would be happy to share more gory details... if it saves someone a lot of heartache and pain, it will be more than worth it.
commentor profile
Reply by a professional
from University of Canterbury in Houston, TX, USA
These are all good creative ideas Jarryd, thanks for sharing. Working on small buy-side transactions one of the biggest challenges we face is the quality of financial information from the seller and the time it takes them to pull this together. We've had sometimes agreed to make a contribution to the seller's cost of getting external help to pull together financial information, and found that this can accelerate the process and greatly improve the quality of financial DD. It has the ancillary benefit of showing the buyer's commitment. Obviously it's not right in every deal, but a useful tool to have in the box. CNP
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