What is quality of earnings (QoE) and who benefits? The main components of a QoE encompass a detailed examination of the three financial statements—profit & loss, balance sheet, and cash flow.

The pivotal outcome is the presentation of adjusted EBITDA, capturing all adjustments derived from internal financial statement analysis and discussions with management, alongside a thorough working capital analysis. Though not universal in every assessment, certain QoEs may involve other common elements such as cash proofs, ARR roll-forward, revenue retention analysis, and project costing analysis.

512Financial’s QoE clients often include private equity sponsors and strategics focused on middle-market transactions. Does this sound like you?

Let us dive into more specifics on QoE.

How is QoE Useful?

Quality of Earnings goes beyond the surface-level numbers to evaluate the underlying factors that contribute to your company’s profitability and overall financial health.

In general, a QoE will take between two to five weeks, depending on the scope. At 512Financial, we conduct QoEs for buy side and sell side, each serving unique purposes.

Buy Side:Involves evaluating the financial health of a target business before acquisition, aiming to ensure the reliability of earnings and identify potential risks. Through thorough due diligence and assessment of financial statements, the goal is to make informed decisions about valuation and acquisition terms.

Sell Side:Involves preparation to sell a company, aiming to attract buyers in potential M&A deals. The goal is to present financial information favorably, emphasizing earnings quality and sustainability to enhance appeal to potential acquirers.

Why is QoE Important?

Think of it this way: although not usually required, a QoE provides a comprehensive assessment of the accuracy and sustainability of reported financials. This provides you with peace of mind, ensuring you receive the full value of your investment. Not having a QoE done puts your company at risk of inaccurate or incomplete financial information.

This can result in unidentified financial issues, such as:

• Undiscovered financial irregularities
• Surprises during due diligence
• Reduced credibility with stakeholders
• Failed transactions
• Shareholder disputes
• Operational challenges
• Strategic missteps

At 512Financial, we specialize in mitigating these risks through meticulous analysis and tailored solutions.

512Financial’s Approach and Expertise

Choosing 512Financial to perform your QoE means investing in quality services at a fraction of the cost offered by others. Unlike other firms, we prioritize thorough financial analysis over rubber-stamp approvals, ensuring that our clients receive the best value from their transactions. With a focus on holistic evaluation and flexibility in scope, we adapt to your evolving needs to provide tailored solutions for your business success.

Our Director of Financial Services, Michael Kirgan, has over a decade of experience with QoE. While performing a QoE analysis for a client looking to buy a company, He was able to save the company from a potentially problematic investment.

The company had already performed their own diligence procedure on the target company they were planning to acquire; they had deemed it a good fit for their portfolio. But were the target company’s reported financials a true reflection of their financial position? The answer was no. The target’s financials were unaudited and in a state of disarray. Michael was able to sift through the noise, decipher pertinent details, and perform a detailed financial analysis that would show the true value of the target company. The target also relied on a third-party accounting firm that was not the most responsive, leading Michael to have to derive most of the information he needed through data manipulation and additional data analysis. With that, he found that the target’s revenue was significantly overrepresented, and their expenses were underrepresented, resulting in an adjusted EBITDA that was significantly lower than initially portrayed.

While many other firms might not have gone through all the trouble Michael had to go through to uncover red flags and ensure the most accurate financial analysis, Michael went the extra mile to ensure his clients make the best decision to help your business succeed. This sentiment is true across the entire team at 512Financial.

Get Started with QoE

Interested in QoE? Contact us to learn more about how 512Financial can help you gain valuable insights and make better informed decisions.