Going to Market Soon? Commission Your Own Quality of Earnings Report
Are you planning to sell your company in the next year or two? Commission your own Quality of Earnings Report — before you go to market.
Why? Because it is a certainty the buyer will commission one. And it could mean you’ll be leaving money on the table.
In our work deploying interim and fractional CFOs and other leaders to help direct transactions on behalf of company owners and board, we can report its now a certainty that private equity deals all require a QOE. Nothing is going to close without one. It’s the EBITDA basis on which most business valuations rest, allowing buyers to use an objective third party's analysis to help finalize the purchase price for your company or any other target companies.
Consider this: if you’re a middle market business owner and you sign a LOI (letter of intent) agreeing to sell your company for 10 times EBITDA, and you believe your earnings to be $10 million, you expect to close for $100 million. And that's what the LOI is going to state - that for sure the valuation is going to be 10x, but it only potentially could be $100 million on closing, so long as the QOE confirms your EBITDA.
In the course of diligence and preparing documents, the PE fund commissions the QOE report. It comes back with an adjusted EBITDA of $9.5 million. Ouch. You’re now going to receive a wire transfer on closing for $5 million less than you expected, because you already agreed to the metric of 10x EBITDA.
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As CFO Jesse Silvertown, CPA, CA, CFF says, “I've found there's always room for negotiation on normalized earnings.” Matt Klauser , transaction advisory partner at FORVIS, LLP puts it this way: “Every deal has items that are clearly either an addback or not, and every deal has grey items that a buyer and seller will need to negotiate. It is often those grey items, which could relate to EBITDA, working capital, or debt-like items, where a buy-side or sell-side diligence advisor adds the most value.”
So be prepared. The good news is, there's great CFO leadership on demand to help you prep for your best exit, including preparation of a QOE.
#qualityofearnings #businesssale #PEfunds #QOE #interimexecutives
Expert advisor recognized as a top woman counselor to privately held business owners; Corporate Board Director
9moCompletely agree! Such an easy strategy to help sellers. Always thoughtful Robert Jordan !
Interim CFO for Growth Stage PE-backed Companies
9moWell put Bob. It is absolutely critical to a Seller's transaction consideration is to get ahead of issues like QoE + due diligence rooms + defensible and transparent financials + believable projections. If you're playing "catch up" during a process, you're leaving $ on the table.