Quality of Earnings in Mergers and Acquisitions
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Performing thorough due diligence is a must in M&A transactions. The acquirer will often want a Quality of Earnings (Q of E) report prepared by an independent party as part of the due diligence process unless the acquisition is inconsequential in magnitude. A Q of E report focuses on the economic earnings power of the target’s business. The Q of E report’s goal is to provide assurance that the earnings are sustainable and will translate into cash flows. Q of E reports are often focused on sustainable earnings before interest, taxes, depreciation and amortization (EBITDA) or free cash flow (FCF).
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