Quality of Earnings (QoE) for small-medium deals

Over the last few years, I've had several people come to me asking if it's necessary to get a Quality of Earnings (QoE) done for deals smaller than $5M. My short answer is yes, but you don't need the level of service that large deals require.

The main difference I've seen in my experience doing QoEs for large deals & small deals is that in large deals a lot of the work is centered around what the buyer needs/wants to know for negotiation purposes. In most cases, the seller's accounting is up to par because they have been paying for audits or reviews annually to fulfill debt covenants or be compliant with regulations. The work is less about making sure the accounting is compliant with GAAP and more about making sure the deal makes sense for your client.

In small deals the seller usually hasn't had their financials audited before. Depending on how small the target is, they might not have even paid for a proper accountant to ensure their books are in order.

While the QoE is still beneficial for negotiation in smaller deals, the greatest benefit of the service comes from reviewing the target's cash movement and ensuring that the revenue numbers the seller provided are accurate. This is called a Proof of Cash. If you don't have this done, you may find yourself wondering why revenues took a deep decline in the years after you acquired the business. The answer could be that the seller wasn't making the amount of money their financials stated when they sold it to you.

It doesn't necessarily mean the seller intentionally committed fraud. Most small business owners aren't accountants, and many use cheap bookkeeping service providers that lack the depth of knowledge that a licensed CPA has.

While my firm still provides full scope QoE's for deals between $10-50M, we recognize that buyers going through due diligence on smaller deals don't usually need a full QoE done. We have tailored a limited Quality of Earnings service to make it affordable for these buyers to still have the essentials (including the Proof of Cash) without paying a $40K+ price tag.

If you're interested in discussing these services, please reach out to me.