A quality of earnings report from a respected industry expert provides an extra level of certainty during a buyer’s due diligence process around an acquisition, or alternatively, gives sellers a third-party party view of potential red flags, issues, or areas of concern from industry outsiders that they can work to clean up to ensure they enter a marketing process at the best time to maximize value.

For buyers, a well-done quality of earnings report is more than just a rubber stamp to present to investors or internal compliance to sign off on a deal. A quality of earnings report provides valuable insight into historical operations and areas to highlight or areas of concern for the go-forward business. For sellers, a well-done quality of earnings report allows a third-party to peek under the hood of their business as if they were a potential buyer to point out inconsistencies with financial data, areas of concern, items to highlight, and processes to improve to better position the seller to maximize value on a sale in the open market.

Once cleaned up, a quality of earnings report for sellers provides potential buyers an extra level of comfort during their diligence process that the financial information they are reviewing has been vetted by a third-party party.

Some of the key procedures in a quality of earnings are presented below:

• Reconcile historical earnings before interest, tax, depreciation, and amortization (EBITDA) to the annual income statement and interim results.
• Understand and evaluate management adjustments to reported EBITDA.
• Examine tax filing positions and reporting.
• Analyze monthly revenue and gross margin.
• Recalculate project-level revenue and savings to verify project economics.
• Analyze run-rate for latest trailing 12-month (TTM) and/or year-to-date (YTD) results, adjusted for pro forma impacts; compare to budget and cash flow forecasts.
• Discuss concentrations of customers, credit risk, and any deductions from gross sales.
• Cash flow analysis (i.e., EBITDA vs. operating cash flow and intra-month cash balances).
• Summarize historic working capital fluctuations and patterns from January 1, 2020, through the date of the latest available balance sheet (e.g., 9/30/21).
• Review material contracts for concerns.
• Inquire as to the existence of off-balance sheet liabilities and assess based on contract review.

A quality of earnings report detailing any findings or issues uncovered through undertaking the above procedures is an important part of the M&A due diligence process and shouldn’t be overlooked.

About The Experts

Gregg Laswell is a Managing Director who works across a number of Opportune’s practices to include Complex Financial Reporting, Restructuring, and Transactional Due Diligence. Gregg has worked on engagements across the entire energy spectrum including service companies that support the space. His principal areas of expertise include assisting debtors or other stakeholders through in-court and out-of-court restructurings, providing buy-side due diligence services, and advising companies on complex financial reporting and financial planning matters. Gregg has experience in mergers and acquisitions, spin-offs, IPOs, troubled debt restructurings, and bankruptcies. His roles have included engagement and transactional responsibility for compliance matters, accounting, transactional due diligence, and valuation engagements. Gregg has experience serving as an expert witness, as well as a Chief Restructuring Officer. Gregg holds a B.S. in Accounting from Washington and Lee University and is a Certified Public Accountant (CPA) licensed in the State of Texas.