UNDERSTANDING THE QUALITY OF EARNINGS IN 5 MINUTES - EVER WONDERED WHAT'S INSIDE?

I've been asked 20+ times this month, "What is inside a Quality of Earnings?". Have 5 minutes?....I'll tell you.


What are the main sections of a Quality of Earnings?

1) EBITDA and Adjustments


2) Proof of Cash and validation that the cash flow is real


3) Analysis of Revenue and Cost Drivers - the basis for your projections and how you'll get ROI


What's included in each section:


Area 1: EBITDA and the adjustments (EBITDA is the same as profit)

- Start with unadjusted EBITDA

- Look at the EBITDA adjustments and be sure they are true expenses you will not need to pay going forward

- Total adjustments should be a reasonable percentage of adjusted EBITDA. Look for large areas of difference that may still make sense (like owner salary for instance)

- That's how the experts do it


Area 2: Cash Proof (building the financials out of the bank statements)

- Bank's version of revenue

- Bank's version of costs

- Banks version of profit

- A good deal has very small differences and they are especially small in the previous year leading up to the acquisition


Area 3: Analysis of Revenue and Cost Drivers - the basis for your projections and how you'll get ROI

- Consistency of margins as the business grows

- Look for any known expenses that you'd expect to see - and make sure they are represented.

- This is where your industry knowledge comes into play but it's important to analyze the historical trends



Now in a 5 minute breakdown I have summarized and missed some things that a QoE does. But I hope in this 5 minute breakdown, people who never have read the report now know what's inside and a bit more on why it's important to get on on your deal.


In the comments, tell me what I missed?


Want to know how the experts read through a QoE: I have four, 1-minute videos explaining each of the three sections. No intro, no marketing pitch, just value for you.. If you'd like the videos - please DM me and I'll share.



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