"Q of" What?
Middle market M&A transactions oftentimes require the production of a report called a “quality of earnings” analysis. Most people, businesspeople or not, have never heard of this, and business owners, upon hearing that they will need one conducted, often have the response that is the title of this article. So what is a quality of earnings report, or “Q of E” in shorthand? In simple terms, it’s an analysis performed on a business’ financials to ensure that the financials were assembled appropriately from a Generally Accepted Accounting Practice (“GAAP”) perspective and equally as important, to ensure that from an analytical perspective (which can be different from an accounting perspective) the financials are telling the appropriate story about the state of the historical financials. In the context of an M&A transaction, there are a couple things of note regarding Q of Es.