Roseville, CA Accountant for Quality of Earnings Study

Cook CPA Group

When a private company is making an acquisition, it’s necessary to go through the process of due diligence to assess the target company’s assets, capabilities, and performance. One of the most important parts of the due diligence process is the quality of earnings study, which provides an analysis of the company’s expenses and revenue in an attempt to assess the company’s sustainability. Performing a quality of earnings study can allow a company to determine the probability of achieving future goals if they acquire the company.

Companies of all sizes can benefit from a quality of earnings study when they acquire assets. If you are a business that would like to assess the risk included in an asset that you are considering acquiring, use the help of an experienced quality of earnings study accountant. The Roseville quality of earnings accountants from Cook CPA Group are able to help companies in all industries with their quality of earnings studies. Get in touch with Cook CPA Group today by calling (916) 432-2218.

Understanding Quality of Earning Studies

A quality of earnings study (also known as a quality of earnings report or a “Q of E”) is a major part of the due diligence process required during acquisition and entails a detailed analysis of the target company’s revenue, expenses, and business practices. Due diligence is a process that is commonplace during mergers and acquisitions—it allows the buyer to confirm essential details about the company they are acquiring or merging with. It entails an assessment of a variety of areas of the company’s health, including its information technology system, operations and marketing, and the full reach of its financial matters.

Quality of earnings studies are an essential part of this process in that they focus on the company’s methods of generating and keeping track of revenue. They focus on an assessment of sustainability, which means its ability to continue to generate revenue.

Many factors that affect a company’s performance are taken into account when performing a quality of earnings study. Inflation, unusual trends and policies, variances in procedure, understated and overstated assets, cost structure changes, flaws in accounting, events that have impacted the company’s numbers, and other manipulations of earnings are taken into account so that the company’s earnings can be considered at face value.

Quality of earnings studies include an analysis of many variables, such as: historic revenue trends, fixed and variable costs, one-time and recurring expenses, relationships with customers and product/service lines, how management changes have impacted revenue and expenses, backlog, key reserves and allowances, account reconciliations, and more.

Though analysis of information is a major part of quality of earnings studies, another important aspect of quality of earnings studies is fact-checking. Accountants that are performing quality of earnings studies will ensure that the company’s books and records are properly kept and that receivables, accruals, and inventory are reflected accurately in the company’s financial statements. During a quality of earnings study, the accountant will confirm that the information in the EBITDA—Earnings Before Interest, Tax, Depreciation, and Amortization—is accurate and valid.

The goal of a quality of earnings study is to assess the probability that the acquisition will allow the company to achieve its goals and objectives; they can establish the value of a business through a detailed analysis of the company’s operations. Essentially, the past and present of the company are analyzed to be able to predict its ability to perform in the future.

The Benefits of a Quality of Earnings Study

Quality of earning studies are crucial for the long-term health of companies. The benefits that companies can reap by using an accountant to perform a quality of earning study are the following:

  • Quality of earnings studies reduce the risk of misunderstandings and miscommunications by making all of the information related to a company’s finances readily available from the start of the acquisition process
  • Valuations of the acquisition are as precise and accurate as possible if a quality of earnings report is performed during the process
  • Negotiations for add-back are easier when a quality of earning study is done by a third party
  • Since a quality of earnings report exposes risk, it can eliminate roadblocks and therefore shorten the length of time that it will take make the deal
  • A quality of earnings study can work in your favor during negotiation because your side of the deal is accompanied by third-party validation of your financial health

How a Quality of Earnings Study is Different from an Audit

Quality of earnings studies are similar to audits but there are major distinctions that should be taken into account. Firstly, an audit focuses on the company’s balance sheet while a quality of earnings study focuses on the company’s overall earning power over time. Also, audits are usually performed at the end of a fiscal year while a quality of earnings study usually takes the preceding twelve months into account. Furthermore, audits are more internally focused while quality of earnings studies (and the due diligence process as a whole) are more focused on the company’s relationships with outside entities.

Contact our Roseville CPAs for Help with a Quality of Earnings Study

When your business is making an acquisition, make sure you know exactly what you’re getting into. Request the services of a Roseville quality of earnings study accountant from Cook CPA Group to help you perform a quality of earnings study to assess the target company’s sustainability, revenue, and expenses. Get in touch with Cook CPA Group today to learn more about scheduling a free consultation to discuss a quality of earnings study. Call (916) 432-2218.

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