Inside the Deal Room: Understanding Earnings Quality Before You Sell
Selling your business is a monumental decision that involves careful consideration and strategic financial preparation. In the latest episode of THE EXIT Podcast, our guests delved into the crucial role that Quality of Earnings (Q of E) plays in this process. Brett Dearing CEPA, CMAA, Host of The Exit Podcast and guest Corey Massella from UHY LLP, Certified Public Accountants provided invaluable insights on how Q of E not only garners the seriousness in potential buyers but also significantly beefs up the eventual selling price. Let's dig deeper into their discussion and understand how to optimize your business's financial health before a sale.
The Importance of Preparing Financially
When the decision to sell looms, a preemptive strike is your best defense. As Brett highlighted, preparing financially isn't just about sprucing up your earnings on paper; it's about conducting thorough due diligence with an eye toward turning every stone and closing any gaps that could alarm potential buyers. Preparing effectively involves employing tools and resources, like a specific workbook created to guide business owners through the necessary financial introspection.
Understanding Quality of Earnings
Quality of Earnings is a meticulous analysis that serves to verify the cash flow and earnings of a business. Think of it as a comprehensive check-up on your company's financial vitals before putting it on the market. Brett likens it to hiring an engineer to examine a house’s foundation pre-purchase—it is an essential display of due diligence and integrity to prospective buyers.
Starting Early with Quality of Earnings
Timing can't be stressed enough when it involves Quality of Earnings. Brett suggests initiating the Q of E process two to three years before placing your business on the market. This forward-thinking approach allows you to view your financials from a buyer's perspective and adjust accordingly, ensuring that when the time comes, there are no surprises that could derail or devalue your sale.
The Role of a CPA
Engagement with a Certified Public Accountant (CPA) is a strategic move in improving financial record-keeping and reporting. A CPA brings expertise in making sure the financial reports reflect the accurate financial position of the business, which is paramount during the Q of E assessment and the entire sales process.
Overcoming Preparatory Challenges
Brett reveals that many business owners fall short when it comes to investing time and resources into preparatory planning, which can unravel during the financial due diligence by potential buyers. The discrepancies in financials can significantly impact the evaluated value of a business. Therefore, understanding and preparing for such issues ahead of time is critical.
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Adding Value Through Preparation
Effective planning and Q of E can profoundly inflate a business's value. This process is seen as a worthwhile investment, considering it generally results in multiple returns on the cost of the assessment. Corey Massella underscored that ultimately, this preparedness translates into a stronger negotiating position, potentially augmenting the business's selling price considerably.
Choosing the Right Q of E Service
Corey Sala from UHY Advisors laid out the spectrum of Q of E services—ranging from a basic workbook approach to a full, exhaustive Q of E. Importantly, he introduced a phased analysis that allows business owners to be educated and correct any process deficiencies before undergoing a more comprehensive Q of E. Having the right tailored service can lead to a more efficient and rewarding sales process.
Conclusion
In selling your business, the devil is in the details—specifically in the financial details. Quality of Earnings is an indispensable element in the sales equation, ensuring your business’s finances bear scrutiny and command the highest price. As our guests stressed, the foundations you build now with a detailed Q of E will pay dividends when it comes time to close the deal.
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Written by: Brett Dearing, CEPA, CM&AA
Host of THE EIXT Podcast
The EXIT Podcast Link: The Importance of Conducting A Quality of Earnings On Your Business Before You Sell: https://podcasts.apple.com/us/podcast/the-exit-podcast/id1308750295?i=1000602896900
