As an owner of a business/practice, if you haven’t heard of Q of E by now, you probably will when you begin the process of preparing your business for sale.
Q of E stands for Quality of Earnings. Assuming you use a legitimate M&A advisor/intermediary, or a CPA or an attorney who is familiar with buying and selling of companies, he/she will mention Q of E up-front, as the business is being organized and prepared for a sale.
Think of it as Pre-Sale Due Diligence as the business is being prepared for sale. When I first got into the business over 35+ years ago, audits were discussed as a pre-sale due diligence alternative.
But that has changed over the years as Q of Es have replaced audits in many cases. And you probably picked up on the operative words: “As the business is being prepared for sale.”
Businesses are prepared for sale so that when the business hits the marketplace, any buyer question that could come up, is prepared for and may be properly answered. Q of Es eliminate surprises, lowers a buyer’s perception of risk, builds trust, and oftentimes increases the value of your business.
Q of Es is an independent financial analysis (usually performed by specialized accounting and/or transaction firms) that is usually focused and directed on the business’ accounting procedures and policies, attempting to ensure that the business has followed generally accepted accounting principles (GAAP), and any irregularities or misstatements are identified and corrected before any financial information is provided to buyers.
Buyers want to ensure that the enterprise value or purchase price that is determined by normalized Earnings Before Interest, Taxes, Depreciation & Amortization (EBITDA), Seller’s Discretionary Cash Flow (SDCF), Revenues, or some other metric, is accurate, sustainable and from on-going operations – not from some extraordinary event.
Q of Es can put a seller in a much better bargaining position to maximize the business’ value, while at the same time it may identify areas of operational improvement.
Q of E is a term that you will likely hear more about. If you have any questions and would like to discuss Q of Es more or need a recommendation for a firm to provide you with a Q of E, do not hesitate to call me.
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