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.

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.

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.

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.

UPDATE: Analysis of the Spirit Fairness Opinions re the JetBlue Acquisition

Earlier this year we reviewed the fairness opinions issued by Morgan Stanley and Barclays for the still pending JetBlue-Spirit merger. In an updated look at the deal, the adage that time is the enemy of all deals comes to mind while pondering Frew’s question from the earlier post of whether JetBlue could close.

Fairness Opinions and Down Markets

The role of the financial advisor becomes tougher when markets are depressed. Questions of value and fair dealing may be subjected to more scrutiny. Declining or depressed markets in the context of negotiating and opining on a transaction will raise the reasonable question: How do current market conditions impact fairness? In this article we discuss some of the issues that may weigh on the decision process and the rendering of a fairness opinion in a depressed market.

Toronto-Dominion Bank and First Horizon National Merger

A tough call for the merger arbitrage community: $25 per share cash deal closes; regulators reject the deal, causing First Horizon National to trade freely in a tough market for bank stocks; or the parties extend the merger agreement again, but does the price get renegotiated?

Analysis of the Spirit Fairness Opinions re the JetBlue Acquisition

The tussle involving Frontier Group Holdings, Inc. and JetBlue Airways Corporation over Spirit Airlines has been decided in favor of JetBlue. In this article we take a look at the fairness opinions rendered by Morgan Stanley and Barclays, then concludes by asking a pertinent question the market seems to have answered even if the board answered in a nuanced way.

Buy-Side Solvency Opinions

Not only is a solvency opinion a prudent tool for board members and other stakeholders, but the framework of solvency analysis is ready made to score strategic alternatives and facilitate capital deployment.

Buy-Side Fairness Opinions: Fair Today, Foul Tomorrow?

Directors are periodically asked to make tough decisions about the strategic direction of a company. Major acquisitions are usually one of the toughest calls boards are required to make. Buy-side fairness opinions have a unique place in corporate affairs because the corporate acquirer has to live with the transaction. What seems fair today but is deemed foul tomorrow, may create a liability for directors and executive officers. This can be especially true if the economy and/or industry conditions deteriorate after consummation of a transaction.

Tesla Walks the Entirely Fair Line with SolarCity

In March of 2016 Elon Musk was laying the ground work for the merger of Telsa, Inc. and SolarCity Corporation. This presentation looks at the issues raised by plaintiffs who alleged Musk orchestrated the deal to bail-out SolarCity, and how the Delaware Court of Chancery ruled on the issues on April 27, 2022 under the entire fairness standard rather than deferential business judgment rule.

Considering Contingent Consideration

Contingent consideration is a common feature of M&A when both parties are private, or the acquirer is public, and the target is private. There are many forms of contingent consideration in M&A. These include post closing purchase price adjustments that can alter total transaction value or that can alter the payment and realization of net proceeds through the recovery of transaction set-asides such as escrow balances or the payment of holdbacks and deferrals.

Negotiating Working Capital Targets in a Transaction

This is the sixth article in a series on buy-side considerations. Our focus in this article is on understanding how and why net working capital targets are crucial for buyers looking to negotiate deals that look good at closing and pass the test as the buyer takes over the operation of the newly acquired business.

Buy-Side Considerations

In this series of articles, we cover buy-side topics from the perspective of middle-market companies looking to enter the acquisition market. Read the articles in this series.

The Importance of a Quality of Earnings Study

This is the fifth article in a series on buy-side considerations. In this series, we will cover buy-side topics from the perspective of middle-market companies looking to enter the acquisition market. Our focus in this article is on how the quality of earnings (QoE) analysis can help acquirers better analyze possible acquisition targets.

Strategic Premiums: Can 2+2 Equal 5?

Many acquirers buy businesses at a value higher than this intrinsic value, paying what is referred to as a strategic premium. In this post we discuss the theory behind strategic premiums, and how they can be advantageous or detrimental to acquirers.

Considerations in Merger Transactions

When considering a buy-side transaction to expand, many middle market companies may not consider a merger transaction as an option compared to an outright acquisition. Mergers are often seen as transactions for big conglomerate-type companies on Wall Street, but they can be effective for middle-market businesses as well. In this article we discuss the key questions that must be addressed when considering a merger transaction, including, corporate governance, social issues and economic questions.

How to Approach a Target and Perform Initial Due Diligence

This is the second article in a series on buy-side considerations. In this series, we will cover buy-side topics from the perspective of middle-market companies looking to enter the acquisition market. Our focus in this article is to summarize some practical considerations for approaching and vetting an identified target.

Identifying Acquisition Targets and Assessing Strategic Fit

With aggregate M&A activity setting records in 2021 and continuing a strong pace in 2022, many businesses are exhibiting a thirst for growth or conversely their shareholders are eyeing an exit at favorable valuations. This article provides touch points and practicalities for identifying viable merger and acquisition targets and assessing strategic fit.

Cash-Out Transactions and SEC Amended Rule 15c2-11

It may seem an odd time for some publicly traded companies to consider cash-out merger transactions because broad equity market indices are at or near record levels. Nonetheless, the changing market structure means some boards may want to consider it.

Understanding Transaction Advisory Fees

As with anything in this world, favorable transaction processes and outcomes require an investment. Fee structures for transaction advisory services can vary widely based on the type and/or size of the business, the specific transaction situation, and the varying roles and responsibilities of the advisor in the transaction process.

Benefits of Hiring an Advisor When Selling Your Business

While many business owners have a general sense of what their business may be worth and a threshold selling price in mind, going at it alone in a transaction process involves more than a notion on pricing – it involves procedural awareness, attention to detail, as well as a good measure of patience despite the desire for an immediate outcome.