WHAT IS QUALITY OF EARNINGS (QOE) AND WHY YOU NEED IT
The QoE is #1 way to verify that you’re buying a good business.
Not only can it enhance your deal, but it can also save you millions. Here’s how...
Let’s start with: What exactly is a Quality of Earnings report?
A Quality of Earnings report is a comprehensive report that you must have before buying a million dollar business. Since you are buying the business to capture the cash flow that it generates, the QoE validates all the ways the business creates cash inside of a[redacted]page report.
If there is no cash - there is no deal. You need to know if there is no cash being generated (which happens more than you think!)
What Makes Up a Quality of Earnings
A company’s Quality of Earnings is determined by identifying and removing any accounting trickery or irregularities that might misrepresent a company’s actual or normalized performance and cash flow. They are not repeatable or sustainable over time, so they should not be a metric used to judge the profitability of a company moving forward.
A Quality of Earnings report will focus on a company’s income statement, but it also drills down into the other financials to examine the condition and worth of assets on the balance sheet, consider the company’s systems of control, and inspect operations. You can expect a Quality of Earnings report to include an EBITDA with adjustments, Cash Proof, and Profit Per Product or Service.
In short, an analysis for Quality of Earnings will identify where financials don’t fully represent a business’s true ability to earn.
Why You Need a Quality of Earnings Report
The financial analysis in a Quality of Earnings report—and the direction provided by due diligence experts like myself—is the information you need to confidently make an acquisition decision. It will give you peace of mind that your target company is a good investment in the long run. If a Quality of Earnings report shows that a target company has misrepresented its future ability to earn, you can use it to negotiate a more reasonable price. Or you can avoid purchasing a non-cash-flowing business altogether.
Quality of Earnings gives you the chance to take a look behind the scenes for yourself. Especially if you’re inexperienced in acquisition, sellers and brokers will try every trick in the book to convince you that you’re making a great investment. I’ve seen it. (Check out my War Stories below.) Stay skeptical, and let the numbers speak for themselves. A Quality of Earnings report will help you do that—and potentially prevent you from making a multi-million-dollar mistake.
My ask: In the comments, tell me a story where a QoE saved you from a million dollar loss! C'mon...I can't be the only person with war stories...