I have a question on Quality of earnings (QoE)

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by a searcher from Duke University - The Fuqua School of Business
in Fort Mill, SC, USA

2yrs ago

I have a question on Quality of earnings (QoE)

If the actual QoE is higher than what the seller reported, can the seller modify the company's asking price?

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reply by an intermediary 2yrs ago
from Babson College in Boston, MA, USA

Technically speaking, as others have mentioned, it is possible to retrade based on the QoE.
If there is a position that the due diligence went through a period that had increased activity and is reasonable to be considered the new baseline, then yes that could make sense. But the increased value should be built into an earn out if possible as opposed to a direct increase to purchase price.
You want to understand the driving reason behind the increased EBITDA. Was it purely QoE/adjustment related? Was it manufactured indirectly by the seller due to the process (i.e. reduced costs) that may result in a reduction in future profitability (i.e. less marketing, less revenue 90 days later). These are purely hypothetical but all indirect factors should be analyzed.
Happy to chat further if you would find it helpful.

reply by a searcher 2yrs ago
from Duke University in Fort Mill, SC, USA

Thank you for your insights. Upon a thorough review of the financial statement, several discrepancies were identified. Despite this, the decision was made not to proceed with the proposed deal, based on the existing market and customer barriers.