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Why is ‘Quality of Earnings’ Important When Selling a Restoration Company?

Q: Recently I heard the term ‘Quality of Earnings’, why is it important when selling a restoration company?    

JT says: Every restoration owner should understand this- your numbers and accounting practices will be scrutinized when selling.  

What-  Quality of Earnings (QE) is a forensic accounting process (by buyer) to verify accuracy of the numbers.  

Why-  Controller and CPA methods vary widely for:  revenue recognition, WIP, revenue/expenses alignment, large loss and CAT accounting practices, etc.  Thus, restoration numbers can be confusing as GAAP accounting is difficult to achieve (Generally Accepted Accounting Principles).

Who-  Most buyers retain a 3rd party forensic accounting firm offering QE services.  

When-  Occurs in due diligence after an accepted LOI and takes 4-5 weeks.  

QE efforts always uncover irregularities. Some are small, others are deal-breakers (leading to renegotiations). As a result, there’s a trend for sellers to conduct ‘sell-side QE’s’. The benefits are numerous-

  • Aligns value expectations early & accurately
  • Increases confidence in buyers & lenders
  • Helps ensure a smooth due diligence & successful sale

Get Answers + Get Prepared = Get Retired


Have a question for JT? Don’t worry, all questions will remain anonymous! You can email JT at jt@exitstrategies360.com.