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How To Tell If Your Earnings Are “Quality Earnings”

If you’re in the process of preparing to sell your business or even considering it, you want to ensure that you’re able to get the most value from your company. There’s one part of preparing to sell a business that plays a significant role in the process of selling your business. Every prospective buyer will request a Quality of Earnings report from you. It’s just intelligent due diligence and the best way to identify your business’s assets’ quality and see any potential financial pitfalls before they buy.

But, what exactly are “Quality Earnings,” and how can you tell if your business’ earnings are considered quality earnings?

That’s exactly what your friends at Maggi Tax want to discuss with you today. This way, you know what exactly quality earnings are before you begin the process of selling your business.

What Are Quality Earnings? 

Quality of your earnings is simply a metric that allows a financial analyst to understand better if the earnings you’re reporting are due to your operational performance or because of accounting adjustments. Your quality of earnings ratio is designed to compare your reported earnings to the cash flow from your operations.

But Why? 

This is done before you sell a business because the reported net income on your statement of income may not be a 100%accurate depiction of your financial performance and health. It’s even possible that you can report significant net income figures and still have negative operating cash flow.

Why Are Quality Earnings Important? 

Your Quality of Earnings Report that you compile when you’re starting the process of selling your business is critical to determining the actual value of your business. It allows a potential buyer to quickly see how your company generates revenue, including cash, non-cash, recurring, and non-recurring streams.

You would be surprised how many acquisitions fail when reviewing a company’s Quality of Earnings Report that highlights the critical financial failures, low cash flow, or high debt payments and overhead.

If you’re considering selling your business, it’s essential to have an accounting partner specializing in helping companies assess their financials and compile a thorough Quality of Earnings Report. Maggi Tax has been helping businesses increase their value through comprehensive and expert Quality of Earnings analytics and reporting. As a result, we have the knowledge and expertise to ensure you’re able to get the most value when you sell your business. Call us today at (813) 850-0131.

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