What to Know About a Quality of Earnings Report in Pre-Sale Due Diligence

Pre-sale due diligence can help increase the valuation of the enterprise and eliminate surprises for the seller in a business transaction. The preparation of a quality of earnings (QOE) report will assist in making an efficient and effective due diligence process.

Understand the Enterprise Value

The enterprise value of the business typically is based on:

  • Earnings before interest, taxes, depreciation, and amortization (EBITDA)
  • Free cash flow (FCF)
  • Revenue
  • Some other driver which is known based on financial statements, and some multiplier of that value that’s specific to the industry and market conditions

Other factors specific to the individual business can contribute to the value of the business. Third-party QOE providers can get granular in analyzing the adjusted EBITDA during a QOE evaluation.

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