By Wes Lewison · Changing Owners · ← All resources
When you take a business to market, plenty is out of your control. The credibility of your financials doesn’t have to be. Sellers sometimes skip a sell-side Quality of Earnings report to save money — only to have the buyer negotiate the price down after finding issues in the internal statements. The savings backfire, expensively.
A Quality of Earnings report is a third-party accounting firm’s analysis of your financials: how sustainable are the revenues, and do the underlying assumptions hold up? Buyers have used the process for decades; it is now becoming best practice for sellers before going to market. Over a few weeks, the QofE team reviews historical revenues, projections, accounting policies, financial reporting and more. If an issue surfaces, you can fix it before listing — or disclose it on your terms. An anomaly in your history is fine when it comes with an explanation; you invested in the company’s future, the expense lowered current profits, and a QofE lets you tell that story as the value it created.
Valuations are a multiple of earnings, and the QofE process uncovers legitimate expense adjustments — one-time legal fees, transition costs, investments that shouldn’t count against future earnings. Higher supportable earnings, higher value. Then put yourself in the buyer’s shoes: a teaser that says “Quality of Earnings available with NDA” is a must-see among hundreds of listings. More buyers at the top of the funnel means a better chance of finding the right steward for your legacy — including cash buyers and strategic acquirers who move fast.
Brokers call the biggest benefit “surety to close.” Deals blow up when due diligence reveals different numbers than were presented. With a QofE in hand, offers come faster, they’re firmer, lender underwriting moves quicker (the underwriter’s hundred questions are mostly pre-answered), and nobody renegotiates your price two months in. Working capital — a top-three deal killer — is displayed right in the report instead of argued about at the eleventh hour.
