Your Blueprint to a Quality of Earnings Report

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A handy guide to a Quality of Earnings Report and reasons you should invest in one

The part of architectural project; blueprint imagery; three rolls of blueprints laying on top of a flattened blueprintA company’s financial history tells a story. One that unveils its day-to-day operations through numbers – successes and failures included. It teaches you what drives consumers to a business and what drives them away. Financial history can show you how a business performs compared to its competitors and so much more. When you’re buying or selling a business, key questions like, “What is the business’s annual revenue?” and “What is the company’s profit?” can all be answered in an analysis of a business’s financial history. However, like any story, a company’s financial history can be easily manipulated into different tales depending on who you hear it from.

That’s where a Quality of Earnings (Q of E) Report comes in.

A Q of E is an objective analysis of a business’s ongoing normalized operations, providing insight to help assess the sustainability and accuracy of a company’s historical earnings and achievability of future projections. Q of E Reports are complex and detailed. Unlike an audit or review, the Q of E Report provides an analysis of all significant components of a company’s revenue and expenses with a focus on ongoing operations. Remember that story we were talking about? Think of a Q of E as the omniscient narrator, who sticks to facts and truth – and provides a full picture of the story.

Look Beyond the Numbers with your Quality of Earnings Report

A Q of E Report is a handy tool for both buyers and sellers. Buyers can see any skeletons in the closet up front and are presented with accurate details of a business’s performance. Sellers, on the other hand, can rest assured their business is presented in an honest light – no surprises permitted!

Ultimately, the goal of a Quality of Earnings Report is to present facts and analysis to help the end users gather conclusions. It features many things a buyer needs to know about a company to determine if it’s a worthy investment, and what a seller needs to accurately (and honestly) present their company’s historical earnings and achievability of future projections. According to Seeking Alpha, a Q of E Report, “won’t tell you if the company is undervalued, if it’s experiencing growth, if its cash flow is strong or if it has too much debt. It will tell you whether you can trust the earnings presented by the company [and] if the earnings are the result of a fundamental advantage that will persist over time or if they are temporary or possibly the result of manipulation.”

UNCOVER INVALUABLE INSIGHT THROUGH A Q OF E

A Q of E Report can provide invaluable insight into a company’s earnings quality (for example, sales fluctuations, expense variances and non-recurring or unusual activity). It can be broadly utilized for:

1. Mergers & Acquisitions
2. Sell-side and buy-side due diligence
3. Final purchase price negotiations
4. A seller to highlight financial strengths and provide an independent and objective analysis of the company
5. Most private equity firm financing needs

TAKING ACTION WITH A Q OF E

Companies can leverage a Q of E Report to determine whether it is making a sound investment. This report serves as a professional financial analysis that identifies inaccuracies or trends that can help inform a business strategy moving forward. Bottom line, a Q of E Report will tell you the most honest truth about a company’s historical performance and can help set expectations for future profitability. And who doesn’t want that when making a large investment or selling a business you built from scratch?

Our team lives and breathes Quality of Earnings Reports. Don’t trust your business with just anyone. Contact our team to learn more about our capabilities.

This publication contains general information only and Sikich is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or any other professional advice or services. This publication is not a substitute for such professional advice or services, nor should you use it as a basis for any decision, action or omission that may affect you or your business. Before making any decision, taking any action or omitting an action that may affect you or your business, you should consult a qualified professional advisor. You acknowledge that Sikich shall not be responsible for any loss sustained by you or any person who relies on this publication.

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