On May 10, 2022, we published Deal Note® 15 entitled “The Three Biggest Sellers Mistakes” in which we discussed the need for sellers of middle market A&D companies to prepare for sale in advance. In it, we suggested to you as the owner to not time the market for selling, to prepare well in advance, and not be penny-wise and pound foolish. This last recommendation alluded to the need to spend money in advance to perform cosmetic improvements on your company, perform regulatory compliance, etc., to assure that you are ready for buyer visits and due diligence. And then on December 12, 2023, we published Deal Note® 97 in which we discussed the concept of performing a Quality of Earnings (QofE) Analysis in advance of launching your sale process stating that we “often recommend” a QofE analysis prior to launching the sale.
However, in late 2024 we have recognized that A&D market expectations have indeed evolved along with buyer behavior. Buyers have become very accustomed to QofE’s in the upper end of the market, and now it’s not just in the upper end of the market, but we are now seeing them required by buyers on all deals in the middle of the market, where Alderman & Company operates. As a result we now insist, not “often recommend,” that sellers of middle market A&D companies perform a QofE as well as implementing the other recommendations of Deal Note® 15. The reasoning is that virtually every buyer we have seen in the past nearly two years will have their own QofE performed along with their conventional due diligence. By you, the seller, having your company’s QofE completed in advance, you will be able to have your third party QofE firm rigorously defend your numbers during the sale process. The good news is that a QofE, while it takes some time and some cost, generally find items in your operation that are additive to your earnings (inventory, compensation addbacks, etc.) which more than pay for the analysis and saves time in fruitless arguments.
Selling your company successfully now requires more preparation by you as the owner upfront than just a year of two ago. It is vital that we, as sellers of middle market A&D companies, recognize that and that you, as the seller, are better prepared to enter the sale process.
Have a great day everyone,
Bruce Andrews
Partner
