The cost of M&A failures is high for both buyers and sellers of family businesses.

• For buyers, overpaying for a target can hamper returns and crowd out other more attractive investment opportunities for years to come.
• Sellers only get one chance to sell their businesses.  Failing to maximize proceeds represents a missed opportunity they can never get back.

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.

1 . Transaction Experience

Don’t view your QofE analysis as a mere “check box” on your diligence list.  A QofE report should provide genuine insight about the target before you reach the closing table.  While a QofE analysis can, in some respects, feel like an audit, it is not one.  Instead, it is a component of transaction diligence, so you should inquire about a potential provider’s transaction experience.

• Has the QofE provider represented buyers or sellers in transactions?
• Has the QofE provider advised buyers on M&A strategy?
• Has the QofE provider rendered fairness or solvency opinions?

2. Valuation Perspective

A quality of earnings analysis is not a valuation.  However, every valuation includes an assessment of earnings quality.  A QofE provider that brings a valuation perspective to the engagement is more likely to identify insights that matter to the proposed transaction price (i.e., valuation).  Because of the close connection between QofE analysis and valuation, you should inquire as to a potential provider’s valuation perspective.

• Does the QofE provider have an active valuation practice?
• Do any of the QofE provider’s team members hold recognized valuation credentials?
• Do the members of the QofE provider’s team undertake continuing professional education
  in valuation topics?

3. Technical Expertise

A quality of earnings analysis requires attention to detail, a thorough understanding of generally accepted accounting principles, and familiarity with the practical elements of accounting practice.  Certified public accountants with audit experience are likely to possess each of these attributes.

• Does the QofE provider’s team include one or more experienced CPAs?
• Does the QofE provider’s team include members with audit or industry experience?

4. A Deep Bench

Transactions don’t wait.  When it is time to move on a deal, you can’t waste time waiting for your QofE provider to catch up.  When evaluating QofE service providers, you should inquire about the depth of resources they can bring to your assignment.

• Does the QofE provider have multiple engagement leaders capable of overseeing your
  engagement?
• Does the QofE provider have a pool of qualified staff capable of executing on the engagement on your timetable?

Conclusion

Successful buyers and sellers take Quality of Earnings analyses seriously.  This requires taking care to select a QofE provider that can be a valuable member of your transaction diligence team.  The best QofE providers generate relevant insights before you close your transaction – those insights are most likely to come from a team with a broad and deep technical skill set, transactional experience, and a valuation perspective.