- Focus: A Q of E analysis concentrates on determining the recurring, normalized EBITDA, a type of quasi-cash flow measure of the business, which is critical component of valuation. It looks at adjustments to EBITDA, working capital, capital expenditures, and identification of debt-like items. In contrast, a CPA audit focuses on expressing an opinion on the fairness of the overall financial statements based on materiality.
- Timeframe: A Q of E analysis looks at current and future operating performance of the business, while a CPA audit is historical and backward-looking.
- Materiality: A CPA audit will pass on certain immaterial items that do not affect the overall fairness of the financial statements, but these same items could have a significant impact on the valuation determined by a Q of E analysis.
The key impact on the due diligence process is that the Q of E analysis provides much deeper and more relevant insights for the buyer to assess the true, recurring core earnings of the business to determine a more informed valuation. After all, the Buyer is really buying future earnings and cash flows.
The Q of E allows the buyer to identify potential red flags, overstatements, and other issues that may not be evident from an audit alone. This enables the buyer to make a more accurate assessment of the business and negotiate the appropriate purchase price.
Here are some key questions and answers a CEO, Board Member, of a Buyer or even a Seller should consider when discussing add-backs to EBITDA with a Mergers & Acquisitions (M&A) specialist:
