A quality of earnings report shows the seller’s cash flow and its actual, normalized EBITDA. As a manufacturer, your cash flow has likely been affected by product recalls, R&D costs, and capital investments. A detailed QoE report will consider these factors while recognizing that these highs and lows do not represent a typical year for your organization. Present a normalized EBITDA over a 2- to 4-year time frame, and consider any interim periods and trailing months.
Your QoE report should provide an extensive view of your organization’s expense structure, touching upon working capital and other balance sheet-related findings. Many buyers now expect manufacturers to validate earnings with exceedingly detailed information (such as figures outlining profitability and expenses by product, customer, geography, and distribution channel).
By conducting this type of detailed earnings assessment, you will identify additional ways to drive value ahead of a potential deal.
Calculate Normalized EBITDA
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Calculating normalized EBITDA can be subjective. The quality of your accounting principles might not align with your view of earnings quality or the degree to which your cash or non-cash earnings can change.
Your normalized EBITDA earnings will serve as a baseline for determining performance expectations in the buyer’s eyes. Issues your organization has faced, such as legal settlements, might not represent a long-term trend. But they can be critical to your performance during a specific period. Lower quality earnings aren’t necessarily a strike against you, but they will indicate that your earnings fluctuate, which translates to higher risk for buyers.
Your organization’s value is measured directly against your normalized EBITDA. Before engaging with prospective buyers, work with a transaction advisor to identify opportunities to boost the reported EBITDA, or determine adjustments, to ensure the best (and most accurate) story is told.
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Facilitate Buy-side Due Diligence
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In today’s data-driven world, prospective buyers demand more information than ever. Ensure all information is well-packaged and get necessary customer and supplier consents. During a transaction, buyers will likely challenge a lot of the assumptions in your normalized EBITDA. Depending on how material these items are, you will need to fight back and assert your value.
About Us
Whether you want to sell or buy a business, Chapman Associates provides a personalized service based upon our sixty-two years of successful M&A closings and our relationships with more than 9,300 registered buyers. Chapman is one of the most respected middle-market M&A firms in the country. What makes Chapman different from the competition? • We make a market for our clients.
• We do not charge any up-front fees.
• Our fees are based on completed transactions.
• We devote senior-level attention to every M&A transaction.
• We do not delegate work to junior staff.
• We help clients set realistic goals and then work hard to exceed them.
• We conduct in-depth research and rigorous analysis.
• We prepare all necessary offering materials.
• We have seventeen offices nationwide to serve our clients.
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