X
X

Find Your Specialist

X

Contact Us

Go Back

Working with Private Equity Quality of Earnings

This blog series examines best practices for CEOs and CFOs who are considering a private equity transaction, culled from working with hundreds of transactions across all industries. The third topic in our series about working with a PEG is Quality of Earnings; (“QofE”) analysis, also referred to as Sell-Side or “Reverse” Due Diligence.

As the name implies, the seller engages a firm like Frazier & Deeter for a laser focus on those earnings metrics that make a difference to a buyer.  Buyers place a premium on earnings that are both sustainable and predictable.

In today’ s blog we will look at a few insights which are drawn from Frazier & Deeter’s QofE engagements.  We have chosen to present certain qualitative views in addition to the familiar quantitative analyses.

How does the customer view you along a spectrum ranging from supply chain partner to commodity supplier Do you participate in the customer’s design process or just get a PO?  There is nothing inherently wrong with either end of the continuum, as long as the target does not think it is at one end and customer has other ideas.  A few years ago, Dell’s new CFO asked how many suppliers Dell had.  No one knew precisely, the number was so large.  His mandate:  reduce suppliers to less than 50, and make them partners in its business.

Does the customer ask for concessions “outside the envelope,” that may be difficult to quantify?  In a recent due diligence engagement, I asked “Who is your best customer?”   Response:  Customer A.  Indeed, Customer A had the largest sales volume.  Customer A was also one of the lower margin accounts.  Further investigation revealed the target warehoused millions in special inventory for Company A, the target often had to arrange personal and rush delivery and training.  Company A forced later-than-normal merchandise returns, and the target received its payments in 60 days (when 30 was the norm for other customers).   When all the factors were evaluated, Customer A emerged as one of the least profitable.

Quality of Earnings can make or break a deal when working with Private Equity. Asking questions like these will help you understand the Private Equity perspective on your business and its sustainability.

If you would like to discuss Quality of Earnings, business valuations or other aspects of selling to a private equity group, Wes Pennington is available at Wes.Pennington@frazierdeeter.com

Related Articles

Privacy Overview

When you use or access the Site, we use cookies, device identifiers, and similar technologies such as pixels, web beacons, and local storage to collect information about how you use the Site. We process the information collected through such technologies, which may include Personal Information, to help operate certain features of the Site (e.g., to prevent online poll participants from voting more than once), to enhance your experience through personalization, and to help us better understand the features of the Site that you and other users are most interested in.

You can enable or disable our use of cookies per category.

When you use or access the Site, we use cookies, device identifiers, and similar technologies such as pixels, web beacons, and local storage to collect information about how you use the Site. We process the information collected through such technologies, which may include Personal Information, to help operate certain features of the Site (e.g., to prevent online poll participants from voting more than once), to enhance your experience through personalization, and to help us better understand the features of the Site that you and other users are most interested in.

You can enable or disable our use of cookies per category.

Necessary Always Enabled

Essential cookies enable you to navigate our Site and use certain features, such as accessing secure areas of our Site and using other features of our service that require us to keep track of certain information as you navigate from page to page. Although some of these cookies are “required” to enable certain functionality, you can disable them in the browser, but doing so will limit your ability to use the features supported by such cookies.

Functionality cookies are cookies that support features of the Site, such as remembering your preferences.

These cookies collect information about how you use our Site, including which pages you go to most often and if they receive error messages from certain pages. These cookies are only used to improve how our Site functions and performs.

From time-to-time, we may engage third parties that track individuals who visit our Site. These third parties may track your use of the Site for purposes of providing us with certain marketing automation features (to help us improve our outreach to current and prospective clients) and providing you with targeted advertisements.