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Home / Articles / How to analyze your business: A quality of earnings Q and A

How to analyze your business: A quality of earnings Q and A

May 6, 2014


Clark Schaefer Hackett has been a constant presence in the manufacturing and distribution industry for decades, working closely with countless businesses to significantly boost the bottom line. Every relationship is founded out of trust and respect, and that type of client/consultant partnership provides the opportunity for the best results.

As a manufacturing business owner yourself, Clark Schaefer Hackett knows that you eventually want to get the best return on your investment when it comes time to sell your business. In order to achieve that goal, you’ll need to perform a quality of earnings analysis, so you can view your business objectively, from the potential buyer’s perspective.

However, this process is in-depth and complicated for manufacturing firms, something that isn’t always the case with other industries. To clarify some common issues, Clark Schaefer Hackett’s Dennis McLaughlin, CPA/ABV, CVA recently took the time to answer some questions about the quality of earnings analysis process.

Q: A quality of earnings analysis and due diligence are vital steps for selling a company. Why should a manufacturing business owner be interested in completing this process?

A: The driving force behind a quality of earnings analysis is the ability to look at a company objectively. When a buyer enters the picture, they’ll want to locate any weaknesses, mistakes or room for improvement that could alter the purchase price. As a seller, you’ll want to find out that information first. Conducting reverse due diligence, also known as the “sale-side of quality of earnings,” will grant you the knowledge you need to get the best possible price.

Q: Why is a quality of earnings analysis more complicated for manufacturing firms than for other industries?

A: For one, many owners don’t understand the true costs of operation. Weaknesses or other problems can cloud the picture, making the sales process more confusing than it needs to be. In addition, manufacturing firms may have multiple complicated business lines. Each one provides a set of data that needs to be looked at. Unfortunately, a lot of owners don’t realize they need to get this in-depth prior to selling.

Q: For sellers, what are some of the most important steps to take before getting a buyer involved?

A: Sellers have to learn what makes their industry – and their business – valuable. A quality of earnings analysis can shed some light on that topic. In order to get the best price, as a seller you should identify value drivers. These include new technology, the customer base, your market share and profitability. Before getting a buyer involved, take some steps to increase value in these areas. Attempt to improve operating efficiency, invest in new opportunities, add profitable customers – and shed some of those that aren’t – and correct issues that could prove detrimental to value.

Q: All of that can be a lot to process. To simplify things, where can sellers begin? What are the components behind a strong quality of earnings analysis?

A: To begin, focus on assessing operations. Take a look at your internal data, breakdown revenue and analyze financial trends. All of these elements comprise effective quality of earnings and due diligence. Also, take a look at your sales functions, purchasing behavior and capabilities. Is your strategy as good as it could be? Do you understand the fundamentals of your business? Above all else, is your operation sustainable? Find out where common risks exist, and implement structures to mitigate those fears.

Q: This is a process that can prove challenging. Manufacturing business owners shouldn’t have to go it alone. How can another set of eyes prove beneficial?

A: Due diligence and a quality of earnings analysis are certainly imperative, but there are more factors to consider when selling a company. With trusted advisors at your side, your decision-making process will be aided by accurate, in-depth data and industry expertise. Businesses who have taken this step alongside our team of certified valuators end up with a successful, profitable sale for all those involved. Better yet, there will be fewer headaches along the way.

© 2014

Further resources for understanding reverse due diligence:

All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a Clark Schaefer Hackett professional. Clark Schaefer Hackett will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.


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