The Best Company to Sell Your Business (for Different Industries)
We explain how to find the best company to sell your business, with tips for comparing advisory firms and examples of 7 companies with a proven track record.
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One of the most important steps of selling a business is when a buyer performs a “Quality of Earnings” review of the seller’s financial statements.  The idea is that the buyer will verify the earnings of the underlying business and any “add backs” that the seller added to the earnings as a representation of what a new owner could expect to receive in cash flow.
Below are the basics of a Quality of Earnings due diligence project:
Who: Â For businesses larger than $500,000 or $1 million in earnings, the buyer will likely hire an accounting due diligence firm. Â Their job is to get into the details and prepare spreadsheets and reports of their findings for the buyer. Â You can expect these firms to be extremely detail oriented and prepared to double-check everything for their client.
What: Â The diligence firm will provide a request list of documents with the goal of being able to verify the earnings the seller has represented. Â Most likely, the firm will spend a few days to a week on site at the company to ask more questions, fine-tune requests, and ask follow-up questions as they get into the details.
When: Â This usually happens after a Letter of Intent is signed between the buyers and the sellers and it is usually the first diligence project undertaken by the buyers. Â The buyers want to verify the earnings power of the business before they spend money with the attorneys to draft the legal documents required.
Why: Quality of earnings due diligence is just good practice.  Many times, sellers do not represent their earnings power properly — not because of any ill intent, they are simply not accounting experts.  The financial statements need to be in proper accounting format so that it is in the language that the buyers and the lenders all understand.  For businesses whose accounting is very well done and they did not make any aggressive add-backs, this will be a “check the box” part of diligence and very easy.  If your accounting is not well done, however, this could be a major issue.
What are some things that a Quality of Earnings diligence firm may find:
In my opinion, the more that sellers know about the process of selling their business, the more that everyone can be assured that the transaction will go smoothly and efficiently for everyone involved. Â Due diligence is a very important step, and the most important part of due diligence is the Quality of Earnings verification.