The last thing you want during any sales transaction is a surprise. Imagine you’re about to sell your home after a year on the market. Everything’s in order, then the inspection comes back: beneath the new paint and sparkling surfaces, termites and mold are wreaking havoc. Surprise! Either you sell now for a lot less than you planned or you go back to the drawing board.
It’s the same when you’re selling a business. Surprises are deal breakers. You need to be the ultimate authority on your own company, dirty laundry and all. That’s why a sell-side Quality of Earnings (QofE) report is so vital.
You can be sure potential buyers will do their own financial diligence and leave no stone unturned. If they discover anything about your business you didn’t disclose (or didn’t already know), boom—you’ve lost any leverage you had to negotiate on price. The risk only increases if you’ve never had any sort of third-party financial statement inspection. You can’t run the risk of opening your books to buyers without knowing what might pop out.
No matter your company’s size or industry, a sell-side QofE is a tremendous advantage when you’re ready to sell. Given the choice between two companies, all other things equal, buyers are more likely to pursue the one bringing a sell-side QofE to the table. The entire process reveals, with astounding clarity, the truth about your company’s value, profitability and performance.
Surprise is in the eye of the beholder
Owners don’t see their business the way outsiders do, and that’s only natural. Over the years, complexities become the norm. The untold number of temporary solutions and workarounds, which keep the doors open and the money flowing in, don’t seem like things that could disrupt or impact a sale. And owners are certain they have nothing to hide.
About 90% of the time, that’s not the case. Sellers don’t always understand what might spook buyers. Something as basic as a customer concentration issue could be a red flag. If you aren’t aware of it, it could cost you big at the negotiating table.
There’s no such thing as too much information
A QofE focuses on your company’s vitals, like earnings and working capital, and assures buyers that your financial records, revenue recognition and other key metrics align with Generally Accepted Accounting Principles. The QofE also normalizes earnings (or losses) by removing significant non-recurring transactions and adjusting for one-time disruptions, like a natural disaster.
Do you have a good handle on what’s in your warehouse? You should. A good QofE will identify and adjust for any inventory obsolescence issues. If you have inventory that’s not clean, usable and salable, or your surplus is too large, your overall value could take a hit.
Buyers are going to find all this out eventually. It’s better for you to find out first.
See the big picture with Sikich
When it’s time for your QofE, team up with a partner who knows what buyers want. At Sikich, our Transaction Advisory experts have extensive experience with QofE reporting for sellers. We simplify the entire process and score major points with buyers by generating an air-tight report along with all the supporting documentation.
Our analysis also includes actionable intelligence for moving forward. For example, if we identify potential red flags, we can propose mitigation strategies. Or, if the overall numbers aren’t where you hoped they’d be, we can suggest options for increasing your business’s value.
The earlier you start your QofE process with Sikich, the more time you’ll have to present the best version of your company—the one with no surprises to spoil a deal.
