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Why You Need a Quality of Earnings Analysis Before Buying a Business

Tyler Trumbull
-  March 7, 2024
What You’ll Learn
  • The importance of conducting a quality of earnings analysis before purchasing a business.
  • The key components of a quality of earnings analysis, including revenue recognition, expense management, and working capital management.
  • How a quality of earnings analysis can help identify potential risks and opportunities for growth in a business.
  • The role of a professional advisor in conducting a quality of earnings analysis and interpreting the results.

Acquiring a business can be an exciting and lucrative opportunity for entrepreneurs, but it isn’t without its risk. Untrained business buyers can often overlook important details during the acquisition process's due diligence phase and buy a bad company.

Fortunately, there are ways to reduce the risk of this process and help ensure that you don’t end up buying a lemon. One crucial aspect of that process is a quality of earnings (QoE) analysis.

Acquira’s Head of QoE recently joined an Acquira weekly call to discuss the importance of a QoE analysis and Acquira’s services in particular.

What Is A QoE Analysis?

A quality of earnings analysis is a comprehensive review of a business's financial statements, accounting policies and procedures, and potential risks or liabilities. This analysis helps potential buyers understand the true financial health of the business and identify any potential red flags or concerns.

According to Vipul Patel, Head of QoE Services at Acquira, “Before acquiring a business, conducting a quality of earnings analysis is crucial to ensure that you are not buying a lemon. This analysis will help you understand the true financial health of the business and identify any potential risks or red flags.”

An effective QoE analysis should include the following:

  • Proof of Cash
  • Quality of Earnings
  • Income Statement Analysis
  • Balance Sheet Analysis
  • Working Capital Analysis
  • Key Risks

Patel explains, “By conducting a quality of earnings analysis, you can negotiate a better price for the business. Suppose there are any issues or concerns uncovered during the analysis. In that case, you can use this information to negotiate a lower price or request that certain conditions be met before the sale is finalized.”

Reducing The Risk Of Business Acquisition

what is quality of earnings report

The purpose of a QoE analysis is to identify any discrepancies or irregularities that may affect the accuracy or reliability of the financial information. This analysis helps the potential acquirer to make an informed decision about the target company's true value and risk.

There are several ways that a QoE analysis reduces the risk of a business acquisition:

  1. Provides a clear picture of the company's financial health: A QoE analysis provides a detailed view of the company's financial statements and accounting practices. It helps the acquirer to understand the target company's financial health, including its cash flow, revenue, and profit margins. This information helps to identify any red flags or areas of concern.
  2. Uncovers any irregularities or inconsistencies: A QoE analysis is designed to identify any discrepancies or irregularities in the financial statements. This could include items such as revenue recognition, inventory valuation, or expenses that have been improperly capitalized. By identifying these issues, the acquirer can determine the true financial position of the target company and avoid overpaying.
  3. Identifies potential risks and opportunities: A QoE analysis can highlight potential risks and opportunities that may not be evident from the financial statements alone. For example, the analysis may identify areas where the target company is losing market share or where it could benefit from operational improvements. By understanding these risks and opportunities, the acquirer can make informed decisions about the potential value of the target company.
  4. Helps to negotiate the purchase price: A QoE analysis gives the acquirer a better understanding of the target company's financial position. This information can be used to negotiate the purchase price based on the company's actual value, rather than relying solely on the financial statements provided by the target company.

Overall, a QoE analysis is a critical tool for reducing the risk of a business acquisition. It provides a detailed understanding of the target company's financial health, helps to identify any irregularities or inconsistencies, uncovers potential risks and opportunities, and enables the acquirer to negotiate a fair purchase price based on the true value of the target company.

Acquira’s Quality of Earnings Services

what is a quality of earnings

Acquira's Quality of Earnings offering is a comprehensive analysis of a business's financial statements, accounting policies and procedures, and potential risks or liabilities. This offering helps potential buyers make informed decisions and mitigate any potential risks or issues.

“Acquira's Quality of Earnings offering is a comprehensive analysis of a business's financial statements, including income statements, balance sheets, and cash flow statements. We also review the company's accounting policies and procedures, as well as any potential risks or liabilities,” Patel says.

For Acquisition Entrepreneurs, having a clear understanding of the financial health of the business they are acquiring is crucial. Acquira's Quality of Earnings offering can help these entrepreneurs make informed decisions and mitigate any potential risks or issues.

Patel emphasizes, “As an Acquisition Entrepreneur, it is important to clearly understand the financial health of the business you are acquiring. Acquira's Quality of Earnings offering can help you make informed decisions and mitigate any potential risks or issues.”

Conclusion

Conducting a quality of earnings analysis before acquiring a business is crucial for potential buyers. This analysis helps buyers understand the true financial health of the business, negotiate a better price, and mitigate any potential risks or issues. 

Acquira's Quality of Earnings service is a comprehensive analysis that can help Acquisition Entrepreneurs make informed decisions and ensure a successful acquisition.

Whether you’ve already found a business you want to acquire or you're just beginning your acquisition journey, Acquira can help you close on the business faster and reduce the risks associated with each step of the journey. Simply fill out the form below to schedule a call with an Acquira representative to learn more.

Key Takeaways

  • A QoE analysis is a comprehensive review of a business's financial statements, accounting policies and procedures, and potential risks or liabilities.
  • A QoE analysis helps potential buyers understand the true financial health of the business and identify any potential red flags or concerns.
  • An effective QoE analysis should include proof of cash, quality of earnings, income statement analysis, balance sheet analysis, working capital analysis, and key risks.
  • By conducting a QoE analysis, potential buyers can negotiate a better price for the business and reduce the acquisition risk.
  • Acquira's Quality of Earnings offering is a comprehensive analysis that can help Acquisition Entrepreneurs make informed decisions and ensure a successful acquisition.
  • Conducting a QoE analysis before acquiring a business is crucial for potential buyers to mitigate any potential risks or issues.
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