Validate business value with Quality of Earnings reports that analyze sustainable income and cash flow performance.
In selling a privately held business, sellers make representations about enterprise value based on the company’s financial statements. Yet recorded income does not always accurately measure the financial performance of a business.
If a company reports large net income but also is recording negative operating cash flow, for example, the entity may not be as sound as it appears. Buyers seek assurances that cash flow and the sources of income are reliable and will continue.
A Quality of Earnings (QoE) study is an important method for valuing a closely held business that has come up for sale.
Buyers request QoE reports to assess whether a proposed acquisition will continue to operate profitably in line with the seller’s representations, and in particular to gauge the stability of future cash flows. They assess how a company accumulates its revenues — such as cash or non-cash, recurring or nonrecurring.
A Quality of Earnings study is not an audit. Instead, it incorporates metrics used to determine earnings and evaluate the sustainability of income. And while a QoE study is a routine step in transaction due diligence, it also helps company executives evaluate the performance of their own business, including in advance of a proposed tender, ownership transition, recapitalization or buyout.
BPM’s Quality of Earnings analyses are conducted by a qualified CPA who specializes in such valuations, and we develop our reports to meet the needs of either buyers or sellers. This includes offering insight into the relative strength of income projections.
We draw on the experience and knowledge of our more than 1,200 colleagues, including teams who perform business valuation, transaction due diligence and other deal-related work.
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