This month’s M&A Minute comes from a recent conversation and brainstorming session with friend and fellow M&A professional, Dan D’Alberto of Purpose Equity. We spent time discussing Sell-Side Quality of Earnings (QoE) reports and why they often make the difference between a strong outcome and a disappointing one.

I asked Dan to summarize a real scenario that highlights this point. His example is below.

The Cost of Skipping a Sell-Side QoE: A $5 Million Lesson

We recently advised a retail distribution company based in Georgia through the sale of their business. The ownership group operated two related entities with intercompany transfers between them, a layer of complexity that can obscure the true earnings picture and leave mistakes buried in the books that the seller never thought to look for.

Early in the process, we recommended the sellers commission a Quality of Earnings (QoE) study. They declined, citing the upfront cost. It’s a common decision, and one that can seem reasonable until you’re on the other side of a re-trade.

We went to market and secured a letter of intent at a $25 million all-cash purchase price, supported by $3.1 million of EBITDA. A strong outcome by any measure. Then the buyer’s QoE came back.

The intercompany transfers (the exact issue we had flagged) drew significant scrutiny.

After adjustments, EBITDA came in at $2.6 million. The purchase price didn’t change, but the structure did. The original $25 million all-cash offer became $20 million at closing with a $5 million earn-out tied to future performance. That $5 million is far from guaranteed.

A seller’s QoE would not have eliminated the issue, but it would have allowed us to address it early, frame it properly, and control the narrative before the buyer used it as leverage. Instead, the sellers absorbed the risk and lost certainty in their outcome.

The cost of a sell-side QoE is often a rounding error compared to the cost of discovering issues at the same time the buyer does.

To complement this "lesson learned" scenario, another good friend and professional partner, Jonathan Barrington with Elliott Davis’s Transaction Advisory Services group, shared a helpful one-pager outlining what they call the “7 Benefits of Sell-Side QoE.”

As always, if you’re thinking about a transition, whether near-term or a few years out, getting ahead of these types of issues can materially impact both value and deal structure. I’m always happy to be a resource or connect you with the right professionals depending on your situation.

Emory

If you'd like to learn more about building the right deal team for your specific goals, I’d be happy to connect. And if you're a professional involved in the dealmaking space and are interested in collaborating with our team (whether through client conversations, events, or digital resources), I’d love to hear from you as well.

Click here to view previous versions of the M&A Minute and other market commentary from Crescent Wealth Management.

Prepared by a CEPA® for educational purposes. If you’d like, I can tailor these insights to your industry, size, and preferred exit path.

Advisory services offered through NewEdge Advisors, LLC, a registered investment adviser. Securities offered through NewEdge Securities, LLC. Member FINRA/SIPC. NewEdge Advisors, LLC and NewEdge Securities, LLC are wholly owned subsidiaries of NewEdge Capital Group, LLC. 

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