Quality of Earnings Report (QoE) in California?
Why do I want a Quality of Earnings Report (QoE)?
A Quality of Earnings Report (QoE) is simply about Trust and Relationships.
Valuing and selling a business in California only works when the seller and buyer trust each other.
A QoE allows the seller to show confidence in their financial statements. They do this by hiring and paying an independent third party to analyze and provide a written report about the business’s recent financial performance. This offering of trust allows the California buyer and seller to build a relationship and determine whether buying the business is suitable for the buyer and the right exit strategy for the seller.
For a QoE to be accurate and relevant, a Certified Analyst prepares financial statements covering a business’s last two full years of operation. Hence, the QoE presents an accurate statement of EBITDA.
A Quality of Earnings Report (QoE) is a certified document or report that a credentialed analyst prepares that validates the past financial performance of a privately held business that is typically looking to have a change of ownership.
Click here to view the Table of Contents of a sample QoE report.
A QoE is typically a statement from a California business owner who plans to sell their business and wants to present it to potential buyers as strongly as possible.
For obvious reasons, a buyer investing in a privately held business is nervous about the quality of the financial statements. Equally, if a buyer needs to get third-party finance, the lender wants to know that the financial statements are sound so they can be confident that the buyer can repay their loan.
A QoE is NOT an audit. If you require an audit, seek the services of a licensed CPA.
QoE gives buyers, investors, lenders, and brokers something to rely on beyond self-reported financials.
What is critical to a QoE is that an analyst with the proper credentials prepares the report and carefully analyzes historical revenues and expenses, sales, significant customer concentrations, and expense add-backs.
A QoE includes but is not limited to:
A QoE is the product of an accredited analyst.
A Master Analyst in Financial Forensics (MAFF) and Certified Valuation Analyst (CVA) prepares your QoE to ensure the report meets the highest standards. NACVA (National Association of Certified Valuators and Analysts) administers these credentials.
The initial documents required are historical annual financial statements (Profit & Loss and Balance Sheet) for the last 2 years with a yearly comparison in one Excel worksheet. If it applies, interim financials by month are also in one Excel worksheet.
It’s not unusual for an analyst to request documents initially. Then, as the analyst starts working on their report, they ask for supporting documents specific to how the financial statements were prepared for the business owner and management.
When you are ready to request a QoE, we will enter into a contract with you with an Engagement Agreement.
Click here to see the Table of Contents of a sample QoE report.
The investment in a QoE varies according to the size of the business or its Gross Revenue.
Paying for a QoE can be a negotiation between the seller and the buyer but it’s normal for the seller to cover most if not all the cost.
The reason for this is that the buyer has no knowledge of the quality of the financial statements and like most of the representations of the seller, accepts them to be true unless the buyer finds out otherwise.
To add to this point, if the seller expects the buyer to pay for the cost of the QoE, it can worry the buyer that the seller doesn’t believe in the quality of the financial documents.
The typical turnaround of a QoE is approximately 6 weeks, but it can be rushed for an additional fee.
The place to start if you want to have a QoE is to get answers to your questions.
If you would like to schedule a call, click this link. This will allow us to understand the purpose of your QoE and answer your questions.
Once you are ready to request your QoE, we will send you an Engagement Agreement to review, complete, and return to us.
If you are ready to start, click this link to complete a short questionnaire and see if we are a good fit to work together.
Rogerson Business Services is a business brokerage service based in California.
If you are ready to sell your California business, let us know your questions. Whether you are selling a medical practice, an HVAC business, a landscaping business, or any other business with gross revenue greater than $2 million, contact us today to learn about our successfully selling your business program.
We’re happy to talk with you about the process of selling your business. Give us a call or contact us when you are ready.
