Transaction Advisory & Quality of Earnings Q&A

A Quality of Earnings (QoE) analysis provides deep insight into the sustainability and accuracy of a company's reported earnings. Harbor View Consulting's QoE analysis examines historical earnings quality, identifies non-recurring items, and assesses the reliability of projected performance. Our comprehensive approach includes revenue quality assessment examining customer concentration and contract terms, expense analysis identifying one-time costs and run-rate adjustments, working capital normalization revealing true cash generation capacity, and EBITDA adjustments providing accurate valuation metrics. We scrutinize accounting policies for aggressiveness, evaluate management estimates and reserves, and identify potential financial reporting risks. For Maryland businesses engaged in transactions, our Baltimore-based team also analyzes pro-forma adjustments, synergy assumptions, and integration considerations. The resulting report provides buyers and sellers with confidence in the underlying business economics, facilitating successful transaction completion.

Quality of Earnings analysis timelines vary based on transaction complexity, data availability, and company size, typically ranging from 3-6 weeks for standard engagements. Harbor View Consulting's streamlined process begins with initial scoping and data requests, followed by intensive analysis phases and culminating in comprehensive reporting. Week one focuses on data gathering, initial reviews, and management interviews to understand business operations. Weeks two and three involve detailed testing of revenue recognition, expense analysis, and working capital assessments. The final phase includes quality review, management discussion of preliminary findings, and report finalization. Our Baltimore team can expedite timelines for urgent Maryland transactions through dedicated resources and parallel workstreams. Factors affecting duration include accounting system complexity, number of business segments, international operations, and unusual transactions requiring deeper investigation. Clear communication and organized data rooms significantly accelerate the process.

Buy-side and sell-side Quality of Earnings analyses serve different objectives while examining similar financial elements. Buy-side QoE, typically commissioned by potential acquirers, focuses on identifying risks, validating seller representations, and uncovering potential issues that could affect valuation or deal structure. Harbor View Consulting's buy-side approach emphasizes conservative interpretations, stress-testing assumptions, and identifying potential working capital traps or hidden liabilities. Conversely, sell-side QoE helps sellers prepare for buyer diligence by proactively identifying and addressing potential concerns, supporting asking price with normalized earnings analysis, and presenting the business's sustainable earnings power. Our Maryland team helps Baltimore sellers position their companies favorably while maintaining credibility through transparent, defensible adjustments. Both approaches require independence and objectivity, but sell-side QoE allows time for remediation before entering the market, potentially improving valuation and accelerating transaction closure.

Working capital peg determination establishes the normalized working capital level expected at transaction closing, directly impacting purchase price through post-closing adjustments. Harbor View Consulting helps Maryland buyers and sellers navigate this critical negotiation point by analyzing historical working capital trends, identifying seasonal patterns, and normalizing for unusual items. Our approach examines monthly working capital levels over 12-24 months, adjusts for non-operational items and timing differences, considers business growth and seasonality impacts, and validates assumptions through detailed account analysis. Key considerations include defining included accounts (operating vs. non-operating), treatment of deferred revenue and customer deposits, inventory valuation methods, and accounts receivable collectibility. Our Baltimore team ensures the peg reflects sustainable business operations rather than temporary fluctuations, protecting both parties from unfair adjustments. Clear definition and calculation methodology prevent post-closing disputes and facilitate smooth transaction completion.