The scene was a large conference room in the offices of a prominent private equity firm when we heard it – inescapably clear – anger, exasperation and frustration – “What happened to the revenues and EBITDA we bought?”
It was an accomplished transaction professional in front of us and the only answer we had was awkward but true. A QofB should have been done. It may very well have made the difference in the final decision making. We were being asked to dive in now and answer the question.
When contemplating an investment or acquisition, private equity investors and strategic acquirers often turn to an accounting firm to prepare a Quality of Earnings (QofE) report which looks at historical financial performance sometimes recasted for certain adjustments. The QofE serves as a key viewpoint of a potential transaction. It is commonly relied upon, but is a QofE sufficient? We think not. Our QofB (Quality of Business) whitepaper explains in detail why and how to enhance the viewpoint on a potential deal.
While QofE focuses on historical financial statements with EBITDA adjustments as a supporting lens on deal pricing and a base for go- forward results, it often fails sufficiently to truly assess, to get under the hood into the revenue engine of a company – the real core of the quality and replicability of a company’s top line and its future success.
The scene in this conference room simply shows that when the proverbial revenue check engine light comes after a deal is completed, it is an awkward question to answer: What happened to the revenues and EBITDA that bought?
Why Accountant produced QofE is Not Enough: The Value of Experience C-Suite Insight
Accountants bring specialized training and expertise in the rules and principles of financial accounting. They excel at identifying operating margin history, financial anomalies, reconciling reported figures, and ensuring adherence to accounting standards and confidence levels on reported results. The accounting staff producing the QofE though often lack real-world experience and domain expertise in revenue generation and results management. .
This is where the QofB assessment, prepared by seasoned C-suite executives, delivers enormous value. Having “sat in the seat” as CEO, COO, CMO and CFO, our QofB professionals bring a depth of experience that transcends numbers. We have carried the responsibility and accountability for both top-line revenue and bottom-line profitability across companies of various sizes and industries, private and public, PE and venture capital backed.
A QofB assessment in a due diligence effort goes deeper, examining critical aspects such as the durability of the business model, changing industry dynamics, marketing strategies, lead generation tactics, customer acquisition strategies, data utilization, data base quality, the state of the business development team, the salesforce composition and talent level, internal protocols, marketing budget allocation, channel tactics and organizational culture – the QofB provides high value insights on the what, the how and the who actually produces and can continue to produce results going forward The QofB provides critical insights into how a company generates revenue, identifies potential scalability, and evaluates whether current infrastructure can meet desired outcomes and deal objectives
Our operational insight allows us to dissect the nuances of a company’s business model, business development, sales, and marketing — and identify elements often overlooked in a QofE. The QofB supplements the QofE to deliver a superior understanding of the financial health of a business as well as its revenue replicability and scalability.
A Holistic Approach: Like Consulting Specialists to Diagnose a Complex Condition
Imagine preparing for a complex medical procedure. Consulting a general practitioner might provide an initial assessment of your condition, but would you proceed without consulting specialists? For a comprehensive and accurate diagnosis, you would likely seek input from practice experts with deep, specific knowledge of that involved. Each specialist contributes unique insights necessary to understand the full picture and determine the best course of action.
The same principle applies to due diligence. A QofE is akin to a generalist’s assessment, it addresses critical but limited financial aspects. In contrast, the QofB brings in the specialized expertise of C-suite executives who deeply understand the intricate systems driving revenue. Together, these perspectives provide a holistic view that reduces risk and equips investors to make well-informed decisions.
A Must-Have Additional Tool in the Dealmaker’s Toolkit
Combining QofB with QofE offers a comprehensive view of the target company, mitigating investment risks and providing clarity on its true value. By integrating QofB into the due diligence process, dealmakers can better position themselves for long-term success.
Discover why the QofB is an essential addition to your dealmaking toolkit—and how it can make all the difference in assessing the true potential of your next acquisition.
