During the process of acquisition, performing due diligence allows companies to assess the capabilities and sustainability of the target company. One vital part of the process of due diligence is the quality of earnings study, which focuses specifically on the target company’s ability to earn and maintain track of revenue. Quality of earnings studies (also known as a quality of earnings report or a “Q of E”) are important for the long-term financial health of companies that are entering into acquisition agreements because they allow the company to appraise the target company’s ability to achieve goals and objectives.
If your company is entering into an acquisition agreement, a quality of earning study will be necessary to ensure the future financial health of your company. Use a Sacramento quality of earning study accountant from Cook CPA Group to perform this vital part of the due diligence process. These experienced accountants can assist companies of all sizes and industries with preparation for acquisition through a quality of earnings study. You can schedule a free consultation with Cook CPA Group to learn more about the due diligence process that precedes an acquisition today.
Quality of Earnings Studies Are a Part of the Due Diligence Process
Quality of earnings studies are an essential part of the due diligence process, which is usually done when a company is making a major acquisition. Due diligence allows buyers to confirm facts and details about the target company—an accountant will take a close look at various areas of the company such as its information technology, marketing, business operations and, most importantly, its accounting and finances.
Quality of earnings studies are only one part of many that comprise due diligence during an acquisition. They are vital because they focus on the target company’s methods of generating revenue and keeping track of it. Quality of earnings studies are focused on assessing the target company’s sustainability, or its ability to create revenue, as well as its expenses and business practices.
It’s important to note how quality of earnings studies (and the entire due diligence process) are different from audits. Audits are usually focused internally while the due diligence process takes a more holistic look at the company’s operations and interactions with outside entities. Also, auditing focuses on the company’s balance sheet while quality of earning studies focus on the earning power of the company over an extended period of time. Audits are usually done at the culmination of one fiscal year while due diligence as part of an acquisition usually assesses the prior twelve months.
Quality of Earnings Studies During Acquisitions
Quality of earnings studies have one objective: to assess the likelihood that the acquisition will be beneficial for the company and will allow the company to reach its goals. When accountants perform a quality of earnings study, they are establishing a business’s value by analyzing all of the aspects of the business’s operations. During a quality of earnings study, the company’s success in the past and present are used to predict its success in the future.
Many components of the company’s operations are assessed during a quality of earnings study, yet deviations and biases are accounted for to create an accurate depiction of the company’s state of health. Factors such as inflation, rare and uncommon events, procedure variances, assets that are understated or overstated, changes in cost structures, accounting flaws, unusual trends, and other occurrences that may manipulate the amount that the company earns will be accounted for.
The variables that are included in an analysis done during a quality of earnings study include fixed and variable costs, the company’s relationship with vendors and customers, account reconciliations, lines of products/services, management changes that have had the ability to impact revenue, changes in expenses, allowances and key reserves.
Fact-checking of disseminated information about the company will also be done during a quality of earnings study. Accountants who perform quality of information studies will examine the company’s books and records to ensure that all of the information is accurate and valid. They will also confirm that the company’s receivables, accruals, and inventory are present in financial statements and recorded accurately. The EBITDA (a company’s Earnings Before Interest, Tax, Depreciation, and Amortization) is also examined for accuracy during a quality of earnings study.
How a Quality of Earnings Study Can Benefit Your Company
The long-term health of a company depends on the proper completion of a quality of earnings study; the benefits that can result from a quality of earning study are manifold. Most importantly, quality of earnings studies ensure that the risk of misunderstanding and miscommunication is as low as possible. Since all of the information about the company is easily accessible following a quality of earnings study, liabilities are exposed.
Since any risks can be addressed from the beginning when a quality of earnings study is done, the length of time that it will take to complete the acquisition will be as short and manageable as possible. A quality of earnings study during an acquisition can also allow for precise and accurate valuations, as well as easy negotiations.
Contact our Sacramento CPAs for Help with a Quality of Earnings Study
A quality of earnings study will allow you to know exactly what you can expect with regard to your acquisition and the financial future of your company. When performing a quality of earnings study on your acquisition, it’s important to use the services of experienced accountants who can make a thorough assessment of the sustainability of the acquisition. The Sacramento quality of earnings study accountants from Cook CPA Group are available to help all companies regardless of their size or the industries they operate in.