Due Diligence

A quality of earnings (QoE) report takes a deep dive into the company’s financial statements, highlighting how the company is generating income and value. It provides a detailed analysis of the company’s accounting policies, financial statements, key performance indicators and cash flow generating capability.

Similar to receiving an inspection before buying a home, a QoE can uncover weaknesses in the company and identify key risks for the buyer as well as opportunities to increase value for the seller. A QoE can also identify business or financial reporting issues that may affect the company’s value. The results can help to avoid surprises for both the buyer and seller. It can also assist the buyer with financing efforts and help them get approval from their board, investment committee or lender.

The QoE analysis may identify issues related to:

• Analysis of financial reporting policies in accordance with GAAP
• Analysis of revenue recognition policy and identification of potential changes to recognized revenue
• Financial statement analysis to identify potential operational changes and strengths and weaknesses of the operations
• Analysis of key performance indicators
• A review of certain balance sheet items, such as receivables and accruals
• Analysis of working capital trends
• Analysis of proposed normalizing adjustments to EBITDA
• Analysis of sources of revenue as well as concentration and backlog analysis
• Review of historical trends related to revenue, gross profit, and operating expenses
• Review of target’s state and federal income tax returns and sales and use tax exposure
• Possible analysis of the company’s forward-looking projections
• Reviewing the draft letter of intent and purchase agreement

Anders clients have the benefit of working with an integrated team of industry specialists from several departments, including audit, tax, transaction advisory and valuation, each able to bring their expertise to the project to drive the best results for our clients. 

A key step in the acquisition or sale process is to gain insight into the value of the company. When there is not a requirement for a full valuation, Anders can provide a calculation of value, which can assist in pre-acquisition analysis and planning. While not as in-depth as a full business valuation, a calculation of value involves a combination of analysis and opinion, combining facts and judgment. In cases where a calculation of value is not the right option, our team of valuation professionals can perform a full business valuation with a detailed report.

Financial reporting and the purchase price allocation are important parts of a business combination. Under ASC 805, Business Combinations, a buyer must recognize the assets acquired and liabilities assumed at fair value. Recognized assets include tangible assets, such as real and personal property, and intangible assets, such as trade names, technology, and customer relationships, among others. Intangible assets are often the most challenging to value but can comprise the bulk of the acquired value in many of today’s deals. Having an experienced valuation advisor on your side can ensure all assets and liabilities are properly valued.

In addition to financial reporting, understanding tax treatment and ramifications, and tax credit eligibility is critical to a successful acquisition or sale. Valuation becomes important when the acquirer must allocate the purchase price to legal entities and categories/classes.