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Quality of Earnings

Delivering Confidence in Sale Valuations

If you’re considering buying or selling a business, an independent quality of earnings (QoE) report can give you the information you need to make informed decisions.

With in-depth and customizable QoE reports, Smolin’s experienced team can help business owners and potential buyers better understand a business’s overall health and long-term financial prospects.

Quality of Earnings Reports That Fit Your Needs

Whether you need a deep dive report with all the details or a top-level report to gain initial understanding of where the business is at, we have you covered.

Core Q of E Assessment

✔️ Identification of historical earnings

✔️ Trend analysis and projections with appropriate adjustments

✔️ Report on potential concerns, including potential balance sheet exposures

Detailed Q of E Report

(All Core Q of E assessment items plus:)

✔️ SWOT analysis by business function

✔️ Cost-out identification

✔️ Customer/relationship portfolio analysis for sustainability and volatility 

✔️ Analysis of systems, process and human capital in comparison with growth expectations

In-depth Financial Reporting

(All Detailed Q of E Report items plus:)

✔️ Assessment of valuation estimates and key assumptions

✔️ Identification of operational bottlenecks and capital requirements

✔️ Team assessment and gap analysis

Benefits of a Quality of Earnings Report

Unlike audits and reviews, which focus on whether or not financial statements are in line with generally accepted accounting principles (GAAP), a QoE report provides a more in-depth analysis of how sustainable the current financial health of a business is. 

Typically, an independent Quality of Earnings Report will: 

  • Analyze monthly revenue and expenses to determine how sustainable a business’s earnings are
  • Identify potential risks that may impact the business’s ability to operate
  • Offer a better understanding of the business’s ability to generate cash flow for investors

QoE reports can be an important step in the diligence process because they may expose red flags that are not immediately apparent in reviewing the business’s financial statements. 

Among other potential concerns, a QoE report can help identify:

  • Revenue that is excessively concentrated with a small percentage of the company’s clientbase
  • Insufficient loss reserves
  • Nonrecurring or unusual income items and expenses
  • Unusual or deficient accounting policies
  • Transactions with related parties
  • Inaccurate period-end adjustments
  • Prospective financial statements that are too optimistic or pessimistic
  • The lag between revenue recognition and cash collection
  • The lag between expense recognition and cash outlays
  • Management's variation of methods and estimating techniques

Smolin’s QoE Reporting Services

The experienced CPAs at Smolin can help you make more informed M&A decisions—no matter what side of the transaction you’re on.

Buy-side quality of earnings reports

As part of the due diligence process in considering whether to acquire a company, you’ll want to make sure you have the most accurate possible forecast of the business’s future financial health and long-term profitability. 

An independent QoE report is a great way to catch the potential red flags you may miss if you’re only considering the business’s financial statements. If the report does identify significant risks or threats, it may allow you to avoid a purchase you’d come to regret down the road—or help you justify a reduced offer price.

Sell-side quality of earnings reports

If you’re looking to sell your business, you’ll want to be aware of any complications that may negatively impact your business’s value or cause a potential sale to fall through. 

A QoE report can give you a better sense of how your business might look in the eyes of buyers (after all, they may also choose to request a QoE report). In some cases, it may alert you to red flags that you weren’t previously aware of and allow you to make corrections before you attempt to sell your business. 

There’s also the possibility that the QoE report will surface positive indicators that aren’t immediately apparent in your firm’s financial statements. In this case, a QoE report may allow your business to justify a higher asking price. 

Customizing Reports to Your Needs

QoE reports don’t fall under the prescriptive guidance of the American Institute of Certified Public Accountants (AICPA). Because of this, the format and scope of QoE reports are quite flexible, and reports can be easily customized to suit your specific situation.

Smolin offers a range of different QoE reporting services to help you create the report that’s best suited to your needs, and we can also adjust the scope of our reports to accommodate your budget.

If you’re considering buying or selling a business, contact us today to see how our QoE reporting team can help you make more informed, reliable decisions.

Meet Our QoE Reporting Team

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