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.
