DealLawyers.com Blog

August 9, 2018

“Quality of Earnings” Studies: A Banker’s Perspective

A third-party “quality of earnings” study has become a fairly common part of the M&A due diligence process. This recent blog from the investment bankers at SRD Ventures says that commissioning such a study provides 3 major benefits to sellers – avoiding price re-negotiation, shortening the deal timeline, and positioning the business for the marketing process.  This excerpt summarizes how a Q of E study can shorten a deal’s timeline:

– Most buyers will not engage their legal counsel to draft closing documents until the Q of E is complete because of the risk of uncovering something important that may jeopardize the deal.

– Nearly 40% of private equity deals in 2015 and 2016 have taken 15 or more weeks to close after the letter of intent because of financial due diligence issues that were not known prior to due diligence commencing.

– Q of E studies typically take around 30 days. Completing this concurrently with your investment banker’s process may eliminate altogether post-LOI delay.

– The cliché “time kills all deals” comes into play. Every day that a deal is under letter of intent is another day something could change in your business.

The blog notes that Q of E studies aren’t cheap – generally costing between $20K to $80K, depending on the company. However, it is important not to cut corners, because it is essential that the end product can withstand scrutiny from a skeptical buyer.

John Jenkins