Quality of Earnings Due Diligence Before You Sell Your Business

When you prepare to sell your house, you know the drill: make repairs, declutter, and make it easy for the next owner to picture themselves living there. That preparatory work is what gets you your best price. Selling a business works the same way. The steps below, including preemptive quality of earnings due diligence, are how you capture the most value when you go to market.

Start With the Low-Hanging Fruit

First, do the things that have been sitting on your to-do list but never got done. Sell the unused equipment. Shut down the unprofitable division. Fire the unprofitable customer. These decisions are difficult, but the value they create is undisputed.

Second, consider where the true value of your business actually lives. If it sits with key employees, promote them, reward them, and do what it takes to keep them in place through the upheaval a sale inevitably brings.

The Importance of Quality of Earnings Due Diligence

The third step is the most important, and it is where most sellers leave money on the table: investing in preemptive quality of earnings due diligence. Most transactions are priced on a multiple of normalized EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization). Normalized EBITDA is your actual historic EBITDA, adjusted for items that better reflect the go-forward business, hopefully in a positive direction. As the seller, you are in the best position to identify the addbacks that improve the purchase price. This is where Inglewood comes in. Our quality of earnings analysis helps you identify and quantify the gems of value buyers will otherwise negotiate away.

Here are selected examples of addbacks we have quantified for sellers:

• Addbacks tied to strategic decisions made in the last two to three years, such as shutting down unprofitable divisions, upgrading equipment to improve efficiency, or expanding or contracting lines of business.
• The impact of new startup offices or branches, using the historic profitability patterns you experienced in past startups to identify the likely profit improvement still to come from newer operations.
• Profitability impact from sales trends, new customers, lost customers, and their respective margins. In automotive cases, for example, we evaluate price downs (reductions baked into the contract) and normal efficiency improvement by part and by model to assess vehicle model sales trends and model turnover.
• The impact of one-time events that raised past expenses but are unlikely to recur, such as an unusual lawsuit settlement, a change in tax or licensing (like new incentives that were not previously in place), and one-time bonus programs.
• Expenses that will go away under the new owner, including payments to the owner, family, or friends that sit outside normal compensation for the market or industry.
• The effect of changes in accounting methodology, such as a historic change in revenue recognition, inventory valuation, reserves for bad debts, or obsolete inventory.
• Addbacks from calculated reserves, accruals, deferrals, and prepaids, including the impact of changes to rebate programs and related volumes.
• The market pricing impact on inventory, including changes in metal markets during periods of volatility.
• External impacts such as market supply and demand factors, tariffs, or labor shortages that fall outside the control of the business, along with proven strategies to mitigate those concerns for the buyer where possible.

Turn Preparation Into Proceeds

If you are considering selling your business, give Inglewood a call. We help identify the gems of value for both your pre-sale actions and the due diligence presentation you put in front of buyers. Done well, it means dollars in your pocket that far exceed the cost of the work. It also pairs naturally with disciplined exit planning and sale preparation, so you go to market ready rather than reactive.