Business Consultants Produce Insightful Quality of Earnings Reports

Thorough analysis informs parties in advance of business transactions

The purchase of a business asset is a significant investment. But can you commit before knowing how much the business is worth? A standard financial statement is a snapshot. It tells you how the business looks on the surface at one frozen moment in time. But to really comprehend the value of an ongoing enterprise, you need to see beneath the surface and observe the business on a continuum. At North American Forensic Accounting PC, we go beyond business valuations to help our clients gain a greater insight into target organizations by producing detailed quality of earnings reports. These reports don’t simply indicate revenue for recent years, which can create a false impression of vitality. We analyze data to determine how performance compares to others regardless of accounting policies. Armed with this information, prospective buyers can proceed, pass, or plot their negotiation strategy with confidence. Business owners can also benefit from quality of earnings reports, which can elucidate areas they might want to strengthen before offering the asset for sale.

What does “quality of earnings” mean?

In business, every dollar earned is a good one, but some dollars are better than others. For example, sales made to customers who are likely to be repeat buyers are more valuable than sales made to one-time buyers. The former type is self-replicating, providing reliable future income; the latter you must find a way to replace, making revenue more speculative. The goal of a QOE report is to give deep insights into an organization, usually as part of due diligence in an acquisition or by a seller preparing to place their business on the market. These deep insights help to reveal the truth behind the numbers of an organization and aid in preventing post-acquisition disputes.

Some of the areas our forensic accountants evaluate as part of a quality of earnings engagement include:

  • The application of General Accepted Accounting Principles (or other comprehensive basis of accounting)
  • Customer concentrations
  • Customer satisfaction
  • Vendor concentrations
  • Backlogs and supply chain risk
  • Length and term of customer contracts
  • Recurring versus nonrecurring transactions
  • Industry trends
  • Cyclical trends
  • Competition
  • Employee statistics and related matters (e.g., key employees)
  • Executive compensation
  • Information Technology
  • Risk management
  • Legal proceedings
  • Existing key performance indicators and behavior
  • Compliance programs and associated risks
  • Recent operational audit results or an assessment of operations and application of industry best practices
  • Business policies and internal controls
  • Evaluation of working capital
  • Cash Flow analysis with a specific focus on cash flows from operations
  • Advanced financial analysis (e.g., quality of earnings ratio)
  • Taxes

When our team performs an assessment, you can be confident we’ve weighed the pertinent factors to arrive at a reliable conclusion enabling you to make informed decisions.

Elements common to a Quality of Earnings Report

The form of a QOE report varies according to the business and the industry in which it operates. Our NAFA team has extensive experience across numerous industries, which enables us to customize your QOE to your needs. However, a standard QOE report generally contains:

    • Executive summary — An overview of the subject business asset. This section provides a concise statement of the key issues and our recommendations
    • Business Overview – An in depth look into the business, its history, and its position in its industry. Also, an evaluation of its competitive advantages, what we call the company’s secret sauce. We also obtain an understanding of existing key performance indicators and their trends.
    • Business Analysis – An unbiased assessment of operating and compliance matters that may ultimately impact value. This assessment goes beyond the numbers and explores some of the ancillary elements described above and more
  • Financial Analysis
    • Cash flows – Following the cash through the business. Answering the questions – where does it come from and where does it go?
    • Income statement — This section examines recent income records, noting trends in revenue and expenses, and assessing explanations.
    • Balance sheet — A detailed assessment of the assets, liabilities, and equity structure of an entity with a particular focus on valuation. Also focusing on working capital and liquidity
    • Adjustments — Where financial complexities could impact the numbers, our analysis suggests appropriate adjustments that result in more representative financial results
    • Trend analysis — We scrutinize current financial trends and offer an opinion as to whether the trends might continue, stabilize, or reverse. We also benchmark to others in the same industry to identify anomalies
    • Taxes – We can help determine a transactions tax impact on the entity or owners
  • Conclusion — We present our judgment about the reliability of future earnings. We also outline any findings that could be impactful to the decisions of the interested parties

Often, our clients have particular concerns about the subject company, which they want us to address. We can readily tailor our QOE analysis to address any issues you believe are pertinent.

Both buyers and sellers should request QOE reports

The ancient principle of caveat emptor warns that the buyer must beware. Thus, a reliable QOE report is part of a buyer’s due diligence. But sellers also benefit from the wealth of information a QOE report contains. The seller’s QOE can inform their strategy for addressing areas of improvement before putting the business on the market.

NAFA conducts QOEs for buyers contemplating an acquisition, and for sellers who need guidance on the best way to prepare their company for sale to maximize the potential return.

Contact North American Forensic Accounting PC for reliable quality of earnings reports

North American Forensic Accounting PC prepares quality of earnings reports for companies of all sizes across the United States. To learn more, call us at 347-286-4860 or contact one of our offices online to schedule an appointment. NAFA serves clients from offices throughout the United States, including in Philadelphia, Pittsburgh, New York City, Atlanta, Charlotte, Miami, and the Tampa Bay Area.