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When Considering a Sale, How ‘Clean’ Do My Numbers Have to Be?

Q: When considering a sale, how ‘clean’ do my numbers have to be?  

JT says: The definition of ‘clean’ takes many forms, allow me to substitute ‘defensible’.  Defensible means, ‘can we prove the numbers are what they appear to be’?  Initial responses are ‘of course’.  However, our industry has unique challenges surrounding consistent accounting methods, revenue recognition (correct time periods), WIP adjustments, collections, overhead allocations, etc.  Add-in large loss / CAT work, accounting gets tricky.  

After an accepted offer and in due diligence, buyers will conduct a Quality of Earnings (QE).  This forensic accounting process answers the ‘prove the numbers’ question above.  The result?  In most instances there are adjustments.  (i.e.- Your definition of ‘clean’ differs from buyers / lenders.) 

The best ‘defense’ is when sellers conduct their own ‘sell-side QE’.  Buyers are then approached with vetted and proven numbers, removing the likelihood of downward adjustments in Adj. EBITDA and business value.  When applicable, a QE helps ensure success with both your sale and retirement.  

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