Transactions between businesses are a broad process that can cover a numerous number of documents and checklists that both the buy-side and sell-side should be aware of when conducting an M&A transaction. Another factor that needs to be a part of the scope is the deal size, small, medium or large. This brings every transaction to the next step QofE (Quality of Earnings Review). Some assume it is the same as a financial audit, while rest assured that is not the case. The goal of a QofE is to examine a company’s historical (Spending & financials), meaning the financial results and analytics to validate the pro forma EBITDA to normalize the levels of support for to purchase price/valuation of the transaction target.
An in-Depth look at the Quality of the Earnings Process
There are obviously two sides to a transaction, the sell-side, and the buy-side. On the sell-side of a transaction, a QofE is usually recommended by the investment individuals, advising the seller to send a more accurate Letter of Intent (LOI) and alleviating the financial due diligence and shorten the timeline post LOI. QofE can also bring to light any future challenges during the confirmatory due diligence causing the defensible EBITDA number to be adjusted in the valuation of purpose.
On the buyer side of a transaction, the QofE’s audience is usually portrayed as a potential buyer, investor, or lender who wants to use the findings to either review or negotiate the final price of the prospective transaction. In these situations, Enara Law PLLC’s team is engaged directly by a private equity group, lender, or a strategic buyer to conduct the QofE review process and provide our expert evaluation. In a typical buy-side process, Enara Law PLLC’s team provides the target with a request list of historical financial and accounting records and begins our analysis as soon as we start receiving this information. Our team’s first goal is to look at the target’s communicated adjusted EBITDA and validate the assumptions and support that were used to arrive at that number. Give us a call today to schedule a free M&A transaction at 602-687-2010, again your first consultation is on us.
If You Have Questions
Enara Law PLLC’s team has deep professional experience providing clients with comprehensive transaction support in addition to a range of other advisory services. If you have any questions about how to get the most out of your financial due diligence process either as a buyer, a seller, or in your role as a business advisor, please reach out to us for help.