Transaction Advisory

Quality of Earnings

Mercer Capital assists clients by developing and performing customized due diligence procedures for potential transactions. Our focused approach to quality of earnings analysis generates Insights That Matter to potential buyers and sellers.

Leveraging our valuation experience, our quality of earnings analyses identify and focus on the cash flow, growth, and risk factors that impact value.

Collaborating with clients, our senior staff identifies the most important areas for analysis, allowing us to deliver qualified, objective, and supportable findings. Our goal is to understand the drivers of historical performance and the key risk and growth factors supporting future expectations. Our methods and experience provide our clients with an independent perspective on the quality, stability, and predictability of future cash flows.

Our methodologies and procedures are standard practices executed by some of the most experienced analysts in the industry.

Our QofE engagements are led by senior professionals with deep transactional experience.

Mercer Capital’s staff consists of CPAs, CFFs (Certified in Financial Forensics), CFAs, industry experts, big four alums, and other valuation and finance experts. Each quality of earnings engagement is staffed appropriately to ensure that our analysis generates Insights That Matter to potential buyers and sellers.

Analysis Performed

Profitability Analysis – Investigating historical reported financial performance to identify the target’s sustainable – and transferable – earning power. We measure pro forma run rate EBITDA (or other relevant measures) for acquisition targets.
Revenue Analysis – Investigating revenue data at the product, segment, and customer levels to reveal underlying trends in growth and customer retention. Procedures include: (1) identifying critical customer concentrations; (2) analyzing gross margin by product, segment, and customer; and (3) customer churn and retention analysis.
Working Capital Analysis – Investigating the components of net working capital required to operate the business. Procedures include: (1) examining collections history, bad debts, and turnover; (2) analyzing inventory components and turnover; (3) reviewing prepaid expenses and operating expense accruals; and (4) assessing impact of seasonality on required working capital levels.

Our QofE engagements are led by senior professionals with deep transactional experience. We leverage that experience to customize procedures to generate Insights That Matter for the specific transaction under consideration.

The areas above are broad and may include a wide array of sub-areas to investigate. Sub-areas include:

Workforce / employee analysis
Intangible asset analysis
Location analysis
Segment analysis
Margin and expense analysis
Working capital analysis
A/R and A/P analysis
A/R aging and inventory analysis
Billing and collection policies
Proof of cash and revenue analysis
Capital structure analysis

Professionals

Travis W. Harms, CFA, CPA/ABV

President

Nicholas J. Heinz, ASA

Managing Director

Timothy R. Lee, ASA

Managing Director

Bryce Erickson, ASA, MRICS

Managing Director

Matthew R. Crow, CFA, ASA

CEO

Research and Resources

Quality of Earnings Analysis Whitepaper: What Buyers and Sellers Need to Know About Quality of Earnings Reports

For buyers and sellers, the stakes in a transaction are high. You only get one chance to do it right. Commissioning a quality of earnings report is an essential step in getting the transaction right. In this whitepaper, we illustrate how buyers and sellers benefit from a quality of earnings report that extracts a company’s sustainable earning power from the thicket of historical GAAP earnings.

5 Reasons Buyers Need a Quality of Earnings Report

In 2024, as the prospect of Fed rate cuts begins to attract buyers back into the market after a period of caution in 2022 and 2023, the importance of thorough due diligence cannot be overstated. Management should pay close attention to the crucial role that a Quality of Earnings ("QofE") report can play in their acquisition decisions. From uncovering sustainable earnings and identifying cost-saving potentials to understanding revenue synergies and assessing capital needs, a comprehensive QofE report emerges as an indispensable tool for business directors aiming to navigate the complexities of acquisitions with confidence and strategic insight.

5 Reasons Sellers Need a Quality of Earnings Report

M&A deal flow was sidelined for much of 2022 and 2023, but the economy’s soft landing, stabilizing interest rates, and pent-up M&A demand are expected to compel buyers and sellers to renew their efforts in 2024 and beyond. As deal activity recovers, sellers need to be prepared to present their value proposition in a compelling manner. For many sellers, an independent Quality of Earnings (“QofE”) analysis and report are vital to advancing and defending their asset’s value in the marketplace. And it can be critical to the ensuing due diligence processes buyers apply to targets. In this article, we review five reasons sellers benefit from a QofE report when responding to an acquisition offer or in preparing to take their businesses to market.

What to Look For in a Quality of Earnings Provider

The cost of corporate M&A failures is high for both buyers and sellers. These high stakes mean that thorough and high-quality due diligence is critical. A Quality of Earnings (or QofE) analysis is an essential component of transaction diligence for both buyers and sellers. Optimizing your transaction diligence requires assembling the right team. In this article, we discuss four things buyers and sellers should look for when evaluating potential QofE providers.

How Does a Quality of Earnings Report Differ From an Audit?

A quality of earnings (“QoE”) report and an audit are both essential tools in the business world, but they serve distinct purposes and offer varying insights. Audits are broader and regulatory in nature, whereas QoE analyses are more focused and strategic, catering to the needs of investors and decision-makers who require a deeper understanding of a company’s true financial health and future potential.