What to Consider

When to Consider a Valuation vs. a Quality of Earnings Report

As a business owner or investor, understanding your company’s financial health and market position is crucial—especially when preparing for a major transaction, such as a sale, acquisition, or funding round. Two of the most important tools for this process are business valuations and Quality of Earnings (QoE) reports. While they serve distinct purposes, knowing when to use each can make all the difference in achieving a successful outcome.

Here’s a breakdown of when to consider each report and how they fit into your overall strategy:

When to Consider a Valuation

A valuation helps you determine the fair market value of your business. This is essential for setting expectations, negotiating deals, or planning for the future. Consider a valuation when:

• You’re preparing to sell your business: A valuation gives you a clear understanding of what your company is worth and sets a benchmark for negotiations with potential buyers.
• You’re raising capital or attracting investors: Investors want to know the value of your business to assess the return on their investment.
• You’re undergoing succession or estate planning: Transferring ownership to the next generation or preparing for an ESOP requires an accurate valuation.
• You need to comply with legal or tax requirements: Valuations are often needed for litigation, divorce settlements, or tax planning purposes.

Key Output: A valuation provides a dollar figure or range that reflects your business’s worth based on financial performance, market trends, and industry benchmarks.

When to Consider a Quality of Earnings (QoE) Report

A QoE report dives deeper into the sustainability and reliability of your company’s earnings. It’s most often used during due diligence in mergers and acquisitions (M&A). Consider a QoE report when:

• You’re preparing to sell your business: Beyond knowing its value, buyers will want to validate your financial performance. A QoE report identifies adjustments to earnings, such as one-time expenses or accounting anomalies, ensuring transparency and avoiding surprises during negotiations.
• You’re buying a business: If you’re the buyer, a QoE report helps you assess whether the company’s reported earnings are accurate and sustainable.
• You want to understand operational risks: A QoE report can uncover inefficiencies or areas of concern, such as aggressive revenue recognition practices or unrecorded liabilities.

Key Output: A QoE report provides a detailed analysis of normalized earnings, helping stakeholders make informed decisions based on the company’s true financial health.

How Valuations and QoE Reports Work Together

While valuations and QoE reports are distinct, they are often used in tandem during major transactions:

• Start with a valuation to set a baseline for negotiations or planning. This gives you an understanding of the company’s worth.
• Follow with a QoE report to validate the financials supporting the valuation. This ensures the numbers are accurate, sustainable, and free of red flags.

For example, if you’re preparing to sell your business, a valuation can establish a realistic asking price, while a QoE report reassures buyers that the earnings justify that price. Together, these tools help streamline the process and build trust with stakeholders.

Making the Right Choice

Deciding whether to start with a valuation, a QoE report, or both depends on your goals:

• If you’re exploring opportunities: Start with a valuation to understand your business’s worth and where you stand in the market.
• If you’re in active negotiations or due diligence: Use a QoE report to validate financials and address any potential concerns.

At Creative Planning, we specialize in helping business owners navigate the complexities of financial reporting and transactions. Whether you need a valuation, a QoE report, or guidance on when to use each, our team can help you make informed decisions and achieve your goals.

Let’s connect to discuss how these tools can empower your next business move.