Many of our clients are founder owners who have dedicated a good portion of their professional career to building a company and they now want to retire. Often, they have rightly focused most of their efforts on creating excellent products and providing outstanding customer support. Less interesting matters (to them), like accounting, might have taken a back seat over the years. And that may not have had any negative effects during the history of the company, until it comes time to sell.
More than any other single factor, buyers are persuaded by the numbers. For over 22 years we have found financial performance to consistently be the number one driver of valuation. We’ve found that many clients’ accounting practices, although perfectly acceptable for daily operations and banking loan agreements, often leave significant value on the table when selling a company. That is why we often recommend hiring an outside accounting firm to perform a Quality of Earnings (QoE) analysis at the outset of a sale process.
As referenced in our “Addbacks” Deal Note® on January 17 of this year, a QoE will typically recommend adjustments to earnings and cash in the following areas:
- Shareholder compensation and expenses paid to affiliates.
- One-time expenses.
- GAAP compliance, such as cash-to-accrual, inventory accounting and capitalizing policies.
QoE’s are relatively inexpensive and take roughly 3 months to prepare, depending on the complexity of the business, and they typically pay for themselves many times over. QoE adjustments almost always boost EBITDA and thus increase buyers’ valuations. Having an expert third party render an opinion as to what EBITDA adjustments are justified adds credibility to those calculations. Additionally, the process of obtaining a QofE better prepares the seller for buyer due diligence and greatly reduces the risk of a downward price negotiation post Letter of Intent.
Have a Great Day,
Managing Director, Aerospace