The Value of a Sell Side Quality of Earnings for Building & Infrastructure Service Businesses
Infrastructure services businesses are enjoying a period of unique opportunity driven by high demand for specialty contractors, engineering firms and construction sectors. However, the project-based revenue model of these businesses doesn’t provide a predictive model that is easily understood by all buyers. Internal accounting practices that manage projects using percentage of completion, POC, methods are challenging and resource intensive to track which can look like added risk to buyers. It’s important that sellers understand how they will be viewed by acquirers and how to make their business attractive in when selling
Companies operating with POC accounting methods are faced with complex resource-intensive tracking, for example, and cash flow management issues between billing and recognizing revenue. Unlike a typical service-based company that can derive the majority of its revenue from recurring service models, many engineering and construction companies don’t rely on such predictable models. While this type of financial management is commonplace for operators, it’s viewed as an added risk for buyers and needs to be addressed before you take your company to market.
Infrastructure services businesses are in high demand. If you’re thinking about selling your business in the future, it’s important to understand the process by which buyers will evaluate the financial health of your company. After signing an LOI, your buyer will typically conduct a Quality of Earnings (QofE) via an accounting firm of their choosing. If the seller is unprepared, this can be a very intensive process.
Unlike an audit, the majority of evaluation work for a QofE can be done remotely. You’ll be expected to provide historical and up to date financials, bank statements, WIP reports, aging reports, inventory reports, GL reports, and more. If there are discrepancies between the figures presented to the buyer at the beginning of the process and what the accounting firm begins to find, then the buyer may want to renegotiate the offer in the LOI. This puts you, the seller, at a disadvantage, weakens the trust between buyer and seller, and ultimately can lessen the likelihood of completing the transaction.
How can the seller flip the script and avoid this mistake?
FOCUS suggests owners play offense rather than defense. What’s becoming more common in sell side M&A transactions is for sellers to commission a sell side QofE prior to going to market. This can take 4-5 weeks for an independent accounting firm to complete and can be done while you’re working with an advisor preparing your company for sale. This same exercise will be conducted by the buyer during diligence, but investing in a QofE ahead of time serves several important purposes: it provides confidence to the buyer that there won’t be surprises in your financials, it increases the value of the offer by confirming the financial health of the company, reduces the perceived risk to buyers, increases the likelihood of closing the transaction, and lessens the time spent on financial analysis during diligence.
The benefits of a sell side QofE for business owners is well worth the investment if you’re looking to exit your business. Taking uncertainty and risk out of the mind of the buyers can allow for a stronger negotiation position during the LOI phase. Therefore, a $40K-$60K investment in a sell side QofE can lead to additional millions of dollars in the sale price. The investment is well worth the time and cost to maximize the leverage potential during a competitive auction process. This represents the most aggressive position a seller can take when looking to sell their business.
Lastly, utilize your M&A advisors to help you select a reputable firm to conduct the QofE. Make sure to ask for multiple recommendations and work with firms that understand POC accounting practices. It’s imperative that the complexities of this business model are understood and the firm regularly performs these types of services. Done well and correctly, a sell side QofE can mean millions of added dollars at closing and a more streamlined financial evaluation for business owners. Like George Washington once said, “The best defense is a strong offense”.
Prior to joining FOCUS, Mrs. White served as a Principal at Walden Businesses, where she participated and closed on middle market sell-side and buy-side engagements in the businesses services, manufacturing, retail, e-commerce, and food and beverage industries. Mrs. White has consulted with hundreds of small businesses and secured over $30 million in funding while working for the University of Georgia’s Small Business Development Center.
For 10 years, Mrs. White worked for TSYS, the largest credit processing company in the world, on global expansion strategies including business development, mergers and acquisitions, company integrations, and lead origination. During her tenure working for TSYS in Europe and the U.S., she led a high growth sales team to secure millions of dollars in new business in domestic and international markets to expand the company’s prepaid and loyalty footprint with large global banking institutions and businesses including Bank of America, Wells Fargo, Santander, HSBC, Mercedes-Benz, and Harley-Davidson.
While serving as president and CEO of The Brumby Chair Company, Mrs. White secured strategic business alliances, positioned an experienced management team, streamlined operations, and developed an e-commerce platform launching the family-owned company into a new era of prosperity.
While maintaining ownership of The Brumby Chair Company, Mrs. White is recognized as a trusted business strategist. She has been a frequent public speaker at international conferences, universities, and professional business organizations. As an ongoing advocate for small business owners, Mrs. White is a frequent guest on Fox Business News, 11-Alive, and WSB Atlanta. She holds a dual Bachelor of Science degree in both Political Science and Accounting from Presbyterian College and an MBA in Marketing from the University of Georgia’s Terry College of Business. In addition, she attended the Certified Mergers & Acquisitions Professional Program at the Coles College of Business’s Executive Education Program at Kennesaw State University.
