The use of sell-side Quality of Earnings (QofE) reports in mergers & acquisitions is a relatively modern development. In earlier decades, financial due diligence was different than it is today. Prior to 2000, buyers were primarily responsible for performing diligence in-house. Sellers typically provided audited or unaudited financial statements with limited emphasis on earnings quality.
As buyers have become more sophisticated over time, buy-side QofE reports also became standard. Initially, Buyers of very large companies would engage independent accounting firms to assess the quality of a target’s earnings. By the mid-2010s, sell-side QofE reports started to become commonplace for sophisticated and large sellers. As discussed in Deal Note® 141, this was due to the substantial benefits it provided such as pre-empting buyer concerns, accelerating due diligence, reducing delays during the buyer’s investigation phase, and maximizing credibility in the numbers stated in the seller’s CIM.
Given the proven benefits, sell-side QofEs have now become standard practice through the middle market of the aerospace & defense M&A industry. Accordingly, we have been advising all of our clients to utilize QofEs, given their proven record for helping sellers close transactions at price levels agreed upon in letters of intent and avoid delays and surprises during buyer due diligence. If you are considering selling your middle-market aerospace & defense company in the near future, you should ensure that you have a QofE prepared, before having discussions with buyers.
Have a great day,
Max McFarland
Associate
