Quality of Earnings

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Understanding the quality of earnings and working capital requirements of a business is a key component of valuation.

Sell-side or buy-side quality of earnings (QofE) is a part of financial due diligence that involves the analysis of an organization’s financial information by an independent party. This is a necessary step during the transaction process because it helps assess the continuity of cash flows and working capitals, which is a key consideration for how a third party will value a business.

The quality of earnings report highlights the key aspects of your business for a specified historical period, including:

  • Normalized level of EBITDA and the addbacks to bridge from reported EBITDA to adjusted EBITDA
  • Fluctuations in annual and monthly financial information
  • Revenue and gross margin by product, customer or distribution segments
  • Operating expenses and employee analysis
  • Key balance sheet highlights
  • Normalized levels of working capital needed to operate the business

Once you decide to engage with a third-party service provider, you can begin to solicit offers. When you work with Eide Bailly, you'll work with accredited professionals, including Chartered Merger and Acquisitions Professionals and Certified Public Accountants who dedicate 100% of their time on due diligence and quality of earnings projects.

When choosing a provider, it’s important to ask questions beyond cost, such as their experience, their transparency during the engagement, the quality of their product, the intended timeline for their process and more. As the QofE process proceeds, we encourage our clients to stay involved. Your involvement gives you the opportunity to ask questions and get a better understand not only the due diligence process but also deal options, value points and the final deliverable.

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