Should sellers have a Quality of Earnings (QofE) performed prior to starting a sale process?
If the buyer is going to hire an accounting firm for a buy-side QofE anyway, why should the seller pay for one?
It is not overly common for business owners to have a sell-side QofE assessment performed prior to going-to-market. The obvious cons are the time, confidentiality risks, and cost. The seller will likely have to bring more people into the “inner circle” early on so that the accounting firm can have a high-quality QofE performed. That presents a loose-lip risk when the sale process is still very early, and nothing is certain. And yes, of course, it’ll likely cost the seller somewhere between $10,000 to $50,000 depending on the firm and scope. So why should sellers consider this?
The pros are less obvious, but very much worth considering:
- Identify issues before the buyer so the seller can remediate before hitting the market.
- Seller M&A counsel will be better positioned to take the lead on drafting a purchase agreement with specific (favorable, market) terms.
- Seller is informed and ready for net working capital discussions.
- Due diligence will move faster (30–45-day closing is much more likely now). Remember: time kills all deals.
- Overall, less pushback from buyers and better negotiating power for the seller.
It is certainly worth considering but it will depend mostly on your unique situation and the quality of your financial reporting. If you’re a seller, please make sure you’re discussing sell-side Quality of Earnings assessment with your M&A advisors and legal counsel.
