Quality Of Earnings Analysis In California

Are you considering selling a lower middle market privately held business? 

It's essential to have a Quality of Earnings (QoE) report that validates the business's past financial performance. 

The QoE report identifies significant risks and discrepancies between the business's financial statements and its likely cash flows under a future owner. 

The report is based on a certified analyst's review of bank statements, financial statements, tax returns, and other data sources. 

Throughout the QoE process, the certified financial analyst works closely with the seller and bookkeeper or CPA to identify the business's assets, liabilities, working capital requirements, and any concerning trends in operations or finances.

The QoE report is critical in helping prospective buyers make informed decisions. 

The report highlights issues that the buyer may want to renegotiate or walk away from the deal. The report also helps buyers determine if the current financing plan will deliver sufficient working capital and how to best operate the business after the transaction closes.

Don't make the mistake of selling a business without a QoE analysis report. 

Access the Table of Contents of a sample QoE report to see the level of detail and analysis that goes into the report. 

Make an informed decision and proceed with confidence. Contact us to answer your further questions and concerns. 

In the world of mergers and acquisitions, three critical factors can make or break a deal. 

First and foremost, accurate financial analysis is crucial to understand the true value of a business. 

Secondly, a motivated buyer with access to financing is essential for a smooth acquisition process. 

Lastly, a motivated seller with all the necessary documents in excellent condition is a must during the due diligence stage to ensure a seamless escrow closing in California.

To maximize the potential of selling a business, one must consider a Quality of Earnings (QoE) report. 

This report helps to present the business to potential buyers in the best possible light. As buyers are naturally nervous about the quality of financial statements, it is essential to provide accurate and reliable statements to instill confidence in them. 

Moreover, lenders need to have confidence in the buyer's ability to repay the loan, which can only be achieved by providing sound financial statements.

By considering these factors, businesses can increase their chances of a successful merger or acquisition deal. 

So, make sure to pay attention to financial analysis, find a motivated buyer with access to financing, and have all necessary documents ready to ensure a smooth and seamless escrow closing in California.

Curious to learn more? Contact us and we'll answer all your questions or concerns. 

Attention business owners seeking to exit their business ownership! If you want to ensure a successful and profitable exit, obtaining your financial documents for analysis and certification should be at the top of your priority list.

When it comes to financial analysis, there are two types you should know about Quality of Earnings (QoE) analysis report and financial audit. While they may seem similar, it is crucial to understand that they serve very different purposes. 

A QoE analysis report is performed by a financial analyst who is an expert in identifying issues that need to be resolved before going to market. In contrast, a financial audit is conducted to verify compliance with generally accepted accounting principles (GAAP).

By obtaining a QoE analysis report, you can identify and resolve potential issues before going to market - a crucial step to ensure the success of your exit strategy. 

Don't risk losing potential buyers by neglecting this important step. Get in touch with us today to schedule a call and learn more about how we can help you achieve a smooth and profitable exit.

Step-by-Step Guide to Using the Formula for Valuation

Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA)

EBITDA is a measure of a company's profitability that takes into account its earnings before interest, taxes, depreciation, and amortization. This metric is important because it gives you an idea of how much money your lower middle market business is making before these expenses are taken into account. To calculate EBITDA, you'll need to add up your business's earnings before interest and taxes, and then add back any depreciation and amortization expenses.

The mathematical formula to calculate EBITDA:

EBITDA = Earnings Before Interest and Taxes (EBIT) + Depreciation + Amortization

Where:

EBIT refers to the earnings generated by a company before deducting interest expenses and taxes.

Depreciation represents the systematic allocation of the cost of tangible assets over their useful lives.

Amortization refers to the gradual reduction of the value of intangible assets over time.

By summing up EBIT, depreciation, and amortization, we arrive at EBITDA, which provides a measure of a company's profitability before considering interest, taxes, depreciation, and amortization expenses. This metric is particularly useful when evaluating the operational performance of a lower-middle-market business.

Read more about the three scenarios below…

Let's now do some calculations for EBITDA in three different business scenarios, taking into account lower middle market companies in California with yearly revenues ranging from $3 million to $20 million:

1)  Service Business

Assuming a service business with a yearly revenue of $5 million and the following financial information:

Earnings Before Interest and Taxes (EBIT) margin: 12%

Depreciation: $200,000

Amortization: $100,000

To calculate EBITDA:

EBIT = Revenue * EBIT margin

   = $5,000,000 * 0.12

   = $600,000

EBITDA = EBIT + Depreciation + Amortization

 = $600,000 + $200,000 + $100,000

  = $900,000

Therefore, the EBITDA for the service business with a yearly revenue of $5 million is $900,000.

2) Manufacturing Business

Considering a manufacturing business with a yearly revenue of $12 million and the following financial data:

Earnings Before Interest and Taxes (EBIT) margin: 10%

Depreciation: $500,000

Amortization: $150,000

Calculating EBITDA:

EBIT = Revenue * EBIT margin

 = $12,000,000 * 0.10

 = $1,200,000

EBITDA = EBIT + Depreciation + Amortization

= $1,200,000 + $500,000 + $150,000

= $1,850,000

Hence, the EBITDA for the manufacturing business with a yearly revenue of $12 million is $1,850,000.

3) Construction Business

For a construction business with a yearly revenue of $18 million and the following financial figures:

Earnings Before Interest and Taxes (EBIT) margin: 8%

Depreciation: $700,000

Amortization: $300,000

Using the formula, we can calculate EBITDA:

EBIT = Revenue * EBIT margin

= $18,000,000 * 0.08

= $1,440,000

EBITDA = EBIT + Depreciation + Amortization

 = $1,440,000 + $700,000 + $300,000

 = $2,440,000

Thus, the EBITDA for the construction business with a yearly revenue of $18 million is $2,440,000.

Please note that these calculations are based on assumed EBIT margins and financial figures within the lower middle market range. The actual EBITDA may vary depending on the specific circumstances and financial performance of each company.

The revenue formula is next. Another popular valuation formula to learn quickly. 

To calculate the worth of your lower middle market business in California, here's a step-by-step guide to using the formula for valuation:

1. Calculate your EBITDA: Start by adding up your earnings before interest and taxes, and then adding back any depreciation and amortization expenses.

2. Determine your revenue: Add up all the money your business has earned from sales over a given period.

3. Find your industry multiples: Look up the average earnings or revenue of companies in your industry to determine your industry multiples.

4. Multiply your EBITDA by the industry multiples: Multiply your EBITDA by the industry multiples to get an idea of your business's value.

Let’s put this into action. Shall we? 

We’ll be using the data from the three scenarios mentioned earlier for a service business, manufacturing business, and construction business:

1. Calculate EBITDA:

For the service business: EBITDA = $900,000 (calculated earlier)

For the manufacturing business: EBITDA = $1,850,000 (calculated earlier)

For the construction business: EBITDA = $2,440,000 (calculated earlier)

2. Determine Revenue:

For the service business: Yearly revenue is $5 million

For the manufacturing business: Yearly revenue is $12 million

For the construction business: Yearly revenue is $18 million

3. Find Industry Multiples:

Research and find the industry averages or multiples for the specific industries (service, manufacturing, and construction) within the lower middle market in California. These averages may vary over time and can be obtained from industry reports, market research, or industry associations.

To find the industry multiple averages for the manufacturing, service, and construction industries, we need to filter the data accordingly. However, the provided data does not include industry categorizations. Therefore, we can approximate the industry categories based on the industry names and make assumptions to determine which industries fall into the manufacturing, service, and construction sectors.

Based on the industry names provided (see data source), we can assign the following industries to each sector:

Manufacturing: 

Aerospace/Defense, 

Auto & Truck, 

Auto Parts, Chemical (Basic), 

Chemical (Diversified), 

Chemical (Specialty), Computers/Peripherals, 

Electrical Equipment, 

Electronics (General), 

Machinery, 

Metals & Mining, 

Oil/Gas (Production and Exploration), 

Oilfield Svcs/Equip., 

Packaging & Container, 

Paper/Forest Products, 

Power, 

Precious Metals, 

Rubber & Tires, 

 Equipment,

Semiconductor, 

Semiconductor Equip, 

Shipbuilding & Marine.

Manufacturing Industry Averages:

EV/EBITDAR&D: 8.93

EV/Revenue: 1.17

EV/EBITDA: 6.72

EV/EBIT: 9.64

Service: 

Advertising, 

Business & Consumer Services, 

Cable TV, 

Education, 

Entertainment, 

Environmental & Waste Services, 

Financial Svcs. (Non-bank & Insurance), 

Healthcare Products, 

Healthcare Support Services, 

Healthcare Information and Technology, 

Hotel/Gaming, 

Information Services, 

Insurance (General), 

Insurance (Life), 

Insurance (Prop/Cas.), 

Investments & Asset Management, 

Recreation, 

Software (Entertainment), 

Technology Services, 

Telecom (Wireless), 

Telecom, 

Computer Services, 

Transportation (Services), 

Trucking, Waste Management.

Service Industry Averages:

EV/EBITDAR&D: 10.27

EV/Revenue: 1.43

EV/EBITDA: 9.05

 EV/EBIT: 12.18

Construction: 

Building Materials, 

Construction Supplies,

Homebuilding, 

Engineering/Construction, 

Real Estate (Development), 

Real Estate (General/Diversified.

Construction Industry Averages:

EV/EBITDAR&D: 11.44

EV/Revenue: 1.09

EV/EBITDA: 9.76

EV/EBIT: 14.02

These averages are calculated based on the multiples provided in the original data and may vary depending on the specific companies within each industry. 

If you find this overwhelming, let us do the heavy lifting. Give us a call and leave a message at (844) 414-9600 and we'll get back to you in 24 hours. 

Acquiring accurate tax returns is crucial for several reasons. 

Firstly, as tax returns are typically prepared by a third party, they are skilled at reviewing the Profit and Loss (P&L) and Balance Sheet to identify inaccuracies. 

Secondly, a lender will use tax returns as an integral part of their loan underwriting process. Especially for an SBA lender, who will require the seller's permission to pull a copy of the tax returns directly from the IRS. Therefore, it is mandatory to have accurate tax returns available for the loan underwriting process. 

By providing accurate tax returns, you can increase your chances of securing a loan and ensuring a successful transaction.

See case studies of smooth quick transactions in California. 

It's crucial to determine the Seller's Discretionary Earnings (SDE) for each year for the last four to five years, as this is the primary metric that lenders look at to evaluate a small to mid-sized privately held business. 

Going back ten or fifteen years may not be meaningful, as it's essential to assess the current financial position of the business. SDE represents the earnings of the business, typically where only one owner works, and it's arrived at after adjustments are made to the financial statements. 

One of the important ratios that lenders look at is SDE/EBITDA, which stands for the ratio between SDE and Earnings Before Interest, Taxes, Depreciation, and Amortization. 

Normalizations are adjustments made to the financial statements to reflect the actual cash flow of the business. 

These adjustments must be legal and include: 

• financing costs, 
• interest, 
• depreciation, 
• one-time expenses, 
• money paid into retirement plans, 
• health insurance, 
• personal benefits, such as car payments, children's education, personal travel, payments to family members, home mortgages, and more. 

All these adjustments are added to the cash flow for debt servicing, which is a critical metric for lenders. It represents the business's ability to generate enough cash to pay off existing debt obligations. Lenders want to ensure that the business generates enough cash to support its operations and pay off its debt obligations.  It is critical to get buyers' interest in your business.

Therefore, it's crucial to ensure that the financial statements accurately reflect the business's financial position. As long as the numbers are accurate, you can be confident that the lenders will evaluate your business's financial position positively.

Ready to start the valuation process and figure out the best market price for your business? Call me toll-free at (844) 414-9600 and leave a message. I'll get back to you in 24 hours. 

It is crucial to evaluate the rent listed on the P&L and tax return to determine if it is based on market rates. 

This can have a significant impact on the business value. A rent above market rates could artificially inflate the value, while a rent below market rates could undervalue the business. Therefore, it is essential to assess the market rates to ensure an accurate reflection of the business value.

Furthermore, it is wise to explore the availability of the real estate for purchase and the seller's asking price. Knowing the market value of the property can help determine if purchasing it alongside the business is a viable option. Evaluating compliance with building codes, environmental regulations, and other requirements is also crucial to avoid legal issues. 

Lastly, purchasing both the business and the real estate has several advantages, such as greater control over the property and easier access to financing. Understanding the motivation behind this approach can help make a well-informed decision. Therefore, it is important to take a comprehensive and detailed approach to evaluating the business and its associated real estate.

Are you considering selling your business with the real estate and need some guidance on what to do next? I'm just one call away at (844) 414-9600  - leave me a message and I'll get back to you in 24 hours. 

Here's the information you need to know:

To request a QoE report, provide historical annual financial statements (Profit & Loss and Balance Sheet) for the last two years in one Excel worksheet, along with a yearly comparison. If applicable, include interim financial statements by month.

Our analysts may ask for additional supporting documents specific to how the financial statements are prepared for the business owner and management.

To request a QoE, we'll need to sign an Engagement Agreement.

To view a sample QoE report's Table of Contents, click here.

Contact us for assistance in preparing your business for a smooth exit. Leave us a message at our toll-free number (844) 414-9600, and we'll get back to you within 24 hours.

Your QoE report is prepared by a Master Analyst in Financial Forensics (MAFF) and Certified Valuation Analysis (CVA), ensuring the highest quality standards. The analyst holds certifications from NACVA, the National Association of Certified Valuators and Analysts.

If you have any questions, please use the form on this page or call (844) 414-9600, and we'll respond within 24 hours.

If you're considering buying or selling a business, it's important to have a trusted advisor on your side to guide you through the transaction process. That's where a business broker or intermediary comes in. They bring a wealth of knowledge and expertise to the table and can help ensure that the transaction is conducted with the highest level of integrity.

My role as a  broker or intermediary is to act as a neutral party, with no vested interest in favoring one party over the other. I work tirelessly to ensure that both the buyer and seller have all the information I need to make informed decisions and that the transaction is conducted fairly and transparently.

Throughout the transaction process, the broker or intermediary takes on a variety of tasks, from helping the seller prepare the business for sale to assisting the buyer with due diligence. I also act as a mediator, helping to resolve any issues that arise during the transaction process.

Ultimately, the success of a transaction depends on the ability of the broker or intermediary to bring the buyer and seller together and facilitate a meeting of the minds. This requires a deep understanding of the transaction process, excellent communication skills, and a commitment to integrity.

At the end of the day, a business broker or intermediary can be an invaluable resource when it comes to buying or selling a business. I act as a trusted advisor, providing guidance and support throughout the transaction process. To ensure that your transaction is conducted with the highest level of integrity, it's highly recommended that you seek the services of a reputable broker or intermediary. 

Learn more with these case studies. 

Would you like a discovery call to see if we are a good fit? Call toll-free at (844) 414-9600  - leave me a message and I'll get back to you in 24 hours. 

The cost of a Quality of Earnings (QoE) report varies based on the business's size or Gross Revenue. 

For lower middle market and larger deals, QoE reports cost $60,000 to over six figures. For small businesses, QoE providers like Pride Valuation, Builders.CPA, and Guardian Due Diligence charge $12,000 to $25,000, depending on the business's complexity and seller's requirements.

Do you have any further questions? Contact us at (844) 414-9600. Leave me a message, and I'll get back to you in 24 hours.

In QoE payment negotiations, sellers usually pay most or all of the cost. Buyers rely on sellers' representations to be true unless proven otherwise. 

If sellers expect buyers to pay, it can signal a lack of confidence in the quality of financial documents.

Moving Ahead

SEE CASE STUDIES OF SUCCESSFULLY SOLD BUSINESSES IN CALIFORNIA - Go To CASE STUDIES

If you're looking to sell your business in California, you know that a QoE report is crucial to showing potential buyers the value of your company. But what if time is not on your side? Don't worry, we've got you covered.

Our team can complete a QoE report in just a fraction of the typical ten-week turnaround time. For no additional fee, you can have your report in hand sooner than you ever thought possible.

Don't let time constraints hold you back from getting the most value for your business. Call us today at (844) 414-9600 and leave a voicemail message. 

We'll get back to you within 24 hours and help you take the first step towards a successful sale.

Are you planning to sell your business? 

You want to find the right buyer and get the best possible price. But how do you ensure that the buyer is getting an accurate picture of your business? That's where a quality earnings report comes in. 

In the QoE analysis and business valuation industry, experts recommend providing a quality earnings report to prospective buyers. Investing in a report may seem like an unnecessary expense, but it can ultimately save you from legal issues that may arise from selling a fraudulent or misrepresented business. 

Not only does a quality earnings report provide transparency to the buyer, but it can also help you negotiate a better purchase price based on the company's true value. 

Keep in mind that most transactions fail to close, and buyers may need to pay for multiple reports before making a purchase. By providing a quality earnings report upfront, you're showing that you're a trustworthy seller who is committed to a fair and honest transaction. 

If you're planning to sell your business in California, we recommend contacting us for a free inquiry today. You'll receive a 30-minute consultation call via Zoom to discuss your options. 

Don't take the risk of selling your business without providing transparency to your potential buyers.

California is one of the many states that follow the escrow system when it comes to selling a business. Under this system, an independent third party, known as an escrow company, holds the money involved in the transaction until all parties have agreed to disperse it.

Escrow companies in California are subject to strict regulations and have clear limitations on what they can and cannot do. They are primarily responsible for holding the funds and monitoring the transaction process to ensure that it is completed smoothly and securely. They can only release the funds once all parties involved have agreed to the terms and conditions of the transaction.

It is important to note that escrow companies are not authorized to mediate disputes between the parties involved in the transaction. This responsibility lies solely with the court. Therefore, all parties must ensure that the terms and conditions of the transaction are clearly defined and agreed upon before it is completed.

Have follow-up questions? I'm just a call away. Call toll-free (844) 414-9600 and leave your message. I'll get back to you in 24 hours. 

Are you a business owner looking to exit or sell your lower middle-market company in California? 

Look no further than RBS Advisors. We offer a solid sell-side M&A process that is ready for business acquisitions and sales. Our professional deal team includes legal experts, CPAs, tax experts, financial planners, M&A advisors, and industry experts, all dedicated to providing top-notch services.

If you're interested in having a Quality of Experience (QoE), we're here to help. To get started, simply click on the link provided to schedule a call with us. 

This will allow us to answer any questions you may have and understand the purpose of your QoE. 

Once you're ready to request your QoE, we'll provide you with an Engagement Agreement to review, complete, and return to us. 

Don't wait any longer to achieve the business success you deserve - contact Rogerson Business Services today!