Quality of Earnings
LCG’s Quality of Earnings Examinations provide lenders, buyers, and sellers involved in an M&A transaction with a high degree of insight into the risks, performance, and opportunities associated with the business under review. These examinations assist the parties in developing the optimal deal structure and help to avoid costly mistakes.
Quality of Earnings Examinations can be used in a variety of transactional situations as they focus on historic and projected financial performance to develop the most complete financial picture of a target. Not only does this process aid in go-forward planning, but also pricing as our professionals drill-down on EBITDA and identify the risks related to a variety of business elements including customer concentrations and relationships, internal controls, corporate governance, financial reporting, and potential liability.
These examinations can also be complemented with a Collateral Field Examination, which focuses more on the quality of the assets on the businesses balance sheet, including accounts receivable, inventory, machinery & equipment, along with the quality of the related asset reporting and control functions.
While LCG customizes its approach for every engagement, key areas of focus on a Quality of Earnings Examination include identifying and analyzing:
- Purchase price adjustments
- Nonrecurring or one-time transactions
- Financial abnormalities that may impact earnings
- Accounting methodology used in revenue and expense recognition
- Sufficiency of management and financial reporting
- Quality of forecasting, the underlying assumptions, and the overall ability of the business to accurately predict performance
- Off balance sheet, contingent, or unrecorded liabilities
- Business integration planning
- Management capabilities
- Sufficiency of working capital
- Understanding Capex requirements