Reasons to Perform a Quality of Earnings (QofE) Check Before or During Due Diligence

As much as we would like to convince ourselves otherwise, accounting is two parts science to one part art. Even the smallest difference in accounting conventions can lead to significant differences in the bottom line in any one financial year. When it comes to M&A transactions, this reality has a tendency to bring out the artist in many brokers and intermediaries. Furthermore, this isn’t unique to the middle and lower middle market. A 2017 Wall Street Journal article noted that shareholder lawsuits for disappointing earnings were on the rise. It stated: “Traditionally, the most lucrative cases for plaintiffs have hinged on misstatements within audited financial statements, which can come to light when a company announces plans to revise previously reported results.” This shouldn’t necessarily be taken as dishonesty; the job of any good intermediary is to maximize value for their client, and aside from the typical exuberance in the sales memorandum,…

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