RIA Valuation Insights Quality of Earnings Analysis for RIAs
As we’ve often highlighted on this blog, transaction activity in the RIA space has increased dramatically over the last decade. Alongside this increase in deal activity, there have been significant developments in the supporting infrastructure for M&A. Many large consolidators now have dedicated outreach and deal teams and standardized due diligence processes. This professionalization of the buyer market combined with more recent headwinds to deal activity have led to increasing scrutiny of target earnings.
In that light, we thought our readers would appreciate a recent Mercer Capital whitepaper on quality of earnings (QofE) analysis. The purpose of a QofE analysis is to translate historical reported (GAAP) earnings into a relevant picture of earnings and cash flow that is useful in developing credible forward-looking estimates. This process can be useful for both buyers (who need a clear picture of the earnings stream they’re acquiring) and sellers (who likewise need a clear picture of the earnings stream they’re giving up and may benefit if given credit for many of the common QofE adjustments).
