February 15, 2024
Adam Hoeksema
Understanding Quality of Earnings Reports
When navigating the complexities of business acquisitions, especially for businesses valued under $10 million, one critical tool in the investor's arsenal is the Quality of Earnings (Q of E) report. This report provides a deep analysis of a company's financial health, beyond what surface-level metrics can offer, emphasizing the sustainability and validity of its earnings. These reports scrutinize revenue recognition, expense recording, and the overall financial practices of a business, offering invaluable insights for potential investors.
As the market increases with more acquisition transactions (see this article from SMBuyer about the “silver tsunami”) the need for these specialized reports grows, and so does the list of service providers.
At ProjectionHub, we've been working with many clients during their acquisition process and recently we introduced a streamlined and more cost effective version of a Q of E report called the "Quality of Earnings Sniff Test." This service offers a quick, simple, and cost-effective solution to validating the quality of a potential acquisition BEFORE an offer is made so you can decide if it’s even worth proceeding.That service will answer some key questions like: Should I even make an offer? How much should I offer? Can this deal qualify for an SBA loan? How much seller note could/should I ask for?
It is common for traditional Q of E not to occur until an officer is accepted or after an LOI (letter of intent) has been signed. Understandably so, the Q of E process requires a lot of access to insider information and it requires considerable time to thoroughly analyze everything. In the cases where going through with a full Q of E process makes sense (even if you have already used ProjectionHub’s “sniff test”) we wanted to highlight a list of Q of E service providers that we think provide a great option.
Q of E Service Providers
Guardian Due Diligence
Guardian Due Diligence stands out with services focused specifically on Quality of Earnings reports and helping clients with due diligence. They have a strong presence on platforms like Twitter and LinkedIn and offer educated expertise. Their website states that they work on deals from $1 to 45 million and services start around $20,000.
Midwest CPA
As a full-service CPA firm, Midwest CPA brings comprehensive financial expertise to the table.They talk in detail on their website about what their financial due diligence process entails but do not mention typical deal sizes or cost of services. They do have the stamp of approval from a popular SBA loan broker on X(twitter).
Builders.CPA
Builders.CPA tailors its services to merger & acquisition entrepreneurs, providing a full suite of CPA services with a personal touch. Their focus on Q of E reports for the acquisition-minded business person sets them apart, offering clarity and confidence to those on the path of business growth.Typical deal size and cost of services is not provided on the website.
OGS Capital
With a background and primary focus on business plan writing, OGS Capital extends its prowess into buy-side due diligence services. Their detailed 33-page DD report exemplifies the depth of their investigations, making them a strong contender for those seeking thorough financial scrutiny. While the cost of services is not provided on the website, they do outline 4 categories of online and offline industry focus areas that all begin at $3 million and above.
O'Connell Advisory Group
O'Connell Advisory Group provides M&A specific services to both buyers and sellers.They state the range of clients they help are $5-50M in annual revenue, $1-$15M in annual EBITDA, or $1-10M in ARR. They list 3 services including a “quick deal review” costing $199 that provides a due diligence checklist and red flag key findings. Their other 2 services are full due diligence offerings that do not state a rice but they do mention they take 1 to 2 weeks in turnaround time.
Petracca Group
Specializing in financial due diligence on the buyer side, Petracca Group shines with active engagement and helpful advice on LinkedIn. Their focused approach ensures that financial due diligence is not just a checkbox but a cornerstone of informed investment decisions. Their website spells out an insightful look of how their process works. They also offer 3 tiers of service pricing starting at $20,000.
Why Choose ProjectionHub's "Sniff Test"
Our "sniff test" is designed for SMBs that need quick, reliable insights without the depth (or expense) of a traditional Q of E report BEFORE they get to the offer stage. It's perfect for businesses seeking a preliminary assessment, offering a cost-effective way to sniff out potential issues before committing to a deeper dive. Using ProjectionHub’s sniff test does not necessarily mean you should skip full QofE later, but it can certainly save you time, energy, money, and risk on deals that end up not being worth your investment.
Making the Right Choice for Your Business
Choosing between a traditional Q of E report and something like ProjectionHub's "sniff test" depends on your specific needs. Consider the size of the transaction, the level of detail necessary, and your budget. For comprehensive analyses, traditional reports are invaluable. But for a high-level overview before you make an offer at a fraction of the cost and time, our "sniff test" is unmatched.
Conclusion
The right Quality of Earnings solution can illuminate the path to a successful acquisition, offering peace of mind and strategic insight. Whether you opt for a traditional report or ProjectionHub's "sniff test," the key is thorough due diligence tailored to your needs. Explore our services to discover how we can help you make informed decisions with confidence.
Interested in learning more about our "Quality of Earnings Sniff Test"? Contact us today to schedule a consultation and take the first step toward smarter, more informed investment decisions.
