• Contact
  • Request Proposal
  • Pay Now
Bowers-Color-Tagline-Horizontal
  • About Us
    • About Bowers
    • Meet the Team
    • Community Involvement
    • Updates
  • Services
    • Tax Services
    • Audit & Assurance
      • Why Does My Organization Need Assurance Services?
    • Bowers Capital Advisors
      • Mergers & Acquisitions
      • Bowers Capital Advisors Experience
    • Business Valuation
    • Client Accounting & Advisory Services
      • CFO Advisory Services
      • QuickBooks Training & Service
      • Starting a New Business
      • Why Outsource Your Payroll?
  • Areas of Service
    • Cannabis
    • Construction
    • Forensic Accounting
    • Governmental
    • Manufacturing
    • Matrimonial
    • Not-for-Profit
    • Railroad
  • Careers
    • Join #TEAMBowers
    • Job Openings
    • WE Excel
✕
  • About Us
    • About Bowers
    • Meet the Team
    • Community Involvement
    • Updates
  • Services
    • Tax Services
    • Audit & Assurance
      • Why Does My Organization Need Assurance Services?
    • Bowers Capital Advisors
      • Mergers & Acquisitions
      • Bowers Capital Advisors Experience
    • Business Valuation
    • Client Accounting & Advisory Services
      • CFO Advisory Services
      • QuickBooks Training & Service
      • Starting a New Business
      • Why Outsource Your Payroll?
  • Areas of Service
    • Cannabis
    • Construction
    • Forensic Accounting
    • Governmental
    • Manufacturing
    • Matrimonial
    • Not-for-Profit
    • Railroad
  • Careers
    • Join #TEAMBowers
    • Job Openings
    • WE Excel
✕
            No results See all results

            Updates

            What is the Value of a Quality of Earnings Report for Businesses?

            May 8, 2023

            When it comes to potential mergers in business, numerous terms and acronyms are frequently used. As a business owner entering the transaction market, it is essential to be fluent in the language. Quality of Earnings (QoE) illustrates this as it is a term frequently mentioned when purchasing or selling a business. So, what is a Quality of Earnings report, and what is its value? To begin, a QoE report is a type of financial accounting due diligence that analyzes the financial data of a business. QoE is related to a transaction where a business is being bought or sold. Although a buyer may need to conduct legal, technology, operational, personnel, tax, and other types of diligence, QoE is a specific exercise conducted during the financial due diligence.


            What a Quality of Earnings Report Entails

            An independent accounting firm conducting QoE examines a company’s financial and operational data focusing on EBITDA, or Earnings Before Interest, Taxes, Depreciation, and Amortization. EBITDA is often considered a more accurate tool for estimating a company’s enterprise value when compared to other indicators like net income. It eliminates the effects of different capital structures and other business conditions that may change post-transaction, despite technically not being a financial measurement defined by U.S. GAAP. This measurement is also a good indicator of a company’s ability to generate operational cash flow. In most cases, sellers present their company’s EBITDA in their offering material, often referred to as a Confidential Information Memorandum, or CIM. On the buyer’s side, an outside specialist, generally a CPA, will be hired to conduct financial due diligence and prepare a QoE analysis.


            Quality of Earnings Analysis

            The primary goal of a Quality of Earnings report is to evaluate the viability and integrity of past earnings and the realizability of future estimates. A buyer should hire independent experts to undertake a QoE analysis after a letter of intent has been executed but before settling the ultimate purchase price and finalizing purchase agreements. A QoE analysis will help support the buyer’s investment thesis. A thorough and professional QoE study considers several factors. Here is a quick list of factors to consider while choosing the right QoE research scope:


            Why EBITDA?

            EBITDA calculates a business’s performance and profitability without taking into account the taxing jurisdictions and positions affecting reported income taxes, accounting policies influencing depreciation expense, and financing decisions impacting interest costs. EBITDA is a metric that allows investors to compare profitability between varying types of companies and industries. It is important to remember that EBITDA does not necessarily reflect cash flow but profitability. Buyers and sellers must also consider Historical Adjustments.


            Types of Adjustment

            There are generally three types of adjustments in regard to the QoE analysis. They are:

            • Pro Forma Adjustment
            • Normalizing Adjustment
            • Due Diligence Adjustment

            About Pro Forma Adjustment

            Pro Forma Adjustments are restatements to earnings for the purpose of projecting the results of the last twelve months (trailing twelve months, ttm) of operations rather than the last calendar year (or reported fiscal year) results. Adjustments may pertain to cyclical effects and the impact of new, or discontinued, revenue streams.

            About Normalizing

            Often, buyers start with a reported EBITDA and then add back different normalizing adjustments to get to an adjusted EBITDA. Determining these modifications is crucial since it directly affects how much a buyer is likely to pay for the company. These adjustments, in a nutshell, represent expenses that are now being recorded as part of the income statement (and consequently included in reported EBITDA) but will not be incurred going forward. Additionally, one-time, non-recurring revenue and expense items are included as normalizing adjustments.

            About Due Diligence Adjustment

            These adjustments are those that the due diligence team discovers. They may include accounting mistakes, the results of unrecorded or under-recorded obligations, or expense allocations from an affiliate. The quantity of these modifications should help the buyer better understand the economic earnings. It will also shed light on the accuracy of the company’s data and the existing financial team’s capabilities.

            Additional Adjustments

            A QoE will also consider adjustments related to generally accepted accounting principles (GAAP) policy application, particularly around balance sheet reserves. GAAP adjustments may include:

            • customer credits
            • uncollectible customer accounts
            • inventory obsolescence
            • accrual for environmental remediation
            • contingency for litigation losses
            • revenue recognition


            Quality of Earnings Report Helps Pave the Road to Success

            A QoE Report offers assurance and comprehension of a business’s operations and the figures upon which the transaction value is based. Realistic expectations of the transaction and confidence and understanding pave the way for successful transactions.

            TESTIMONIAL QUOTE:

            “Mike and Carl helped guide us through the process of our management acquisition and provided value-added service in every facet of the transaction. Also, when it came time to finding a financial partner for our business, we turned to them once again. They were consultants, as well as tax and audit CPAs, and added tremendous value to the process.” 

            Bob Brotzki CEO, Schneider Packaging Equipment Company, Inc.

            Sign Up for Our Newsletter


            About Bowers

            Bowers aims to offer helpful information to our clients and friends. Learn more about how we can help should you need accounting and business consulting services.

            Disclaimer: To ensure compliance with requirements imposed by the Department of Treasury, we inform you any U.S. federal tax advice contained in this document or video is not intended for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing, or recommending to another party any transaction or matter that is contained in this document.

                      No results See all results

                      Recent Posts

                      • William T. Kriesel Honored with Partner in Philanthropy Award by CNY Community Foundation
                        William T. Kriesel Honored with Partner in Philanthropy Award by CNY Community Foundation
                        April 28, 2025
                      • Peer Review highest rating for quality and compliance
                        Bowers CPAs & Advisors Earns Top Peer Review Rating
                        January 30, 2025
                      • Tax changes every taxpayer should know
                        Key Post-Election Tax Changes Every Taxpayer Should Know
                        January 7, 2025
                      • Construction CFO Services
                        Why Construction Companies Need CFO Services to Build a Solid Business Infrastructure
                        September 23, 2024
                      • Diesel Fuel Tax Credit
                        Maximizing Tax Savings in Construction: Diesel Fuel Tax Credits & Key Filing Insights
                        September 16, 2024
                      Share

                      Related posts

                      succession plans
                      May 14, 2024

                      Navigating Ownership Transition: Succession Plans for Business Success


                      Read more
                      Continuity Plans, construction business
                      February 27, 2024

                      The Overlooked Necessity of Continuity Plans in Construction Business


                      Read more
                      Mergers and Acquisitions - What to Expect
                      February 1, 2024

                      Mergers & Acquisitions: What to Expect


                      Read more
                      Bowers-Invert-Tagline-Stacked
                      • About Us
                      • Services
                      • Areas of Service
                      • Careers
                      • Get in Touch
                      • Pay Now
                      • Payroll Login
                      • Client Portal Login
                      • Request Proposal

                      333 West Washington Street, Fifth Floor,  Syracuse, NY 13202
                      (315) 234-1100

                      1120 Commerce Park Drive E, Watertown, NY 13601
                      (315) 788-7690

                      200 Meridian Centre Blvd., Suite 130, Rochester, NY 14618
                      (585) 244-9590

                      COPYRIGHT © 2023 Bowers CPAs LLC All rights reserved.

                      PRIVACY POLICY  |  TERMS OF USE