I have a question on Quality of earnings (QoE)

searcher profile

March 11, 2024

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

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

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commentor profile
Reply by an intermediary
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.
commentor profile
Reply by a searcher
from University of California, Berkeley in Seattle Metropolitan Area, WA, USA
Were you splitting the cost of the QoE? Or was it lender-required and then shared? Short answer, sure. If you set the expectation that you could retrade based on an agreed QoE, then I'd hope it went the other way for transparency. But I think that will depend entirely on how you set the stage for the deal in LOI and what you were expecting to gain from QoE (checking NWC levels, accounting and cash operations, inventory, customer data, etc).
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