Given the fact that acquisition transactions are based on a multiple of some financial measurement (i.e. EBIT, EBITDA, etc.), today, investors, whether strategic or financial, and financial institutions are required to perform a considerable amount of due diligence before they execute a financial transaction. Furthermore, it is imperative for you to look at the operational and strategic elements of the target as well as the more common areas such as strength of the balance sheet and quality of the target's earnings. As you know, transactions today are more complex than in the past due to sheer size, geography (cross-border) and regulation.
Determining how reliable the financial measurements used to value an investment is the real focal point of our quality of earnings assessment services. Specifically, our team of experts performs a comprehensive analysis by:
- Identifying the key financial risk areas of the target and its industry.
- Making inquiries of management and independent third party accountants, if available, to review processes and practices in all key financial areas introducing risk into the transaction.
- Focusing on the financial areas most subject to estimates and understand how these estimates affect the reasonableness of the valuation methodology employed and availability of historical evidence to support the amounts.
- Evaluating the impact of non-financial factors on the key financial risk areas.
- Verifying target add-backs, if the target provides adjustments to the underlying measurement
In essence, our experience has shown that some targets find creative ways to report its financial condition when preparing financial statements. For your investment to succeed, you must have a thorough understanding of the target’s sustainable earnings via a comprehensive review of its accounting procedures as well as its method for documenting changes in revenues, expenses, and balance sheet accounts.