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Why a Quality of Earnings Report is So Important

Ask any business owner and they’ll no doubt tell you there’s much to consider when contemplating either buying or selling a business. The process can last months or even years as the owner pulls in experts, reviews reports and considers all the facts before signing on the dotted line. A critical piece of this due diligence is the quality of earnings report (Q of E) that provides a detailed analysis of how a company records its revenues, such as cash or non-cash, recurring or nonrecurring. The Q of E report’s goal is to provide assurance that earnings are sustainable and will also translate into cash flows. Reports are usually focused on sustainable earnings before interest, taxes, depreciation and amortization (EBITDA) or free cash flow (FCF). FCF performs an analysis of working capital needs for the business as well as capital expenditures that are needed. Q of E reports are prepared by independent third parties and usually by the buyer or their representative. The seller may also have an independent third party prepare a Q of E report in preparation for a sale. 

In this blog we will further define the quality of earnings report, examine why this is a critical report to review during the buy/sell process, and offer a list of the most important components of a reliable Q of E report. You’ll also hear from the CEO of a global manufacturer about what he views as the most crucial takeaways.

Quality of Earnings: What is it?

A Q of E report offers a close examination of company finances. Unlike an audit, Q of E reports typically focus on trailing 12 months (TTM) and usually a few historic periods as well. They are also more focused than an audit. It typically can take anywhere from three to four weeks to complete a Q of E report depending upon the availability of data and management’s responsiveness.

Components: What’s in a Q of E Report?

Q of E reports usually include but are not limited to:

  • Executive Summary including a business overview and the transaction overview (if known)
  • Income statement section that may include the following:
    • Breakdown of revenue by components such as customer/product lines/service lines
    • Historical revenue trends
    • Determination of one-time income/expenses vs recurring expenses
    • Management EBITDA adjustments are analyzed
    • Diligence adjustments to EBITDA suggested by the preparer
  • Balance Sheet is disclosed and analyzed
  • Working capital is analyzed in detail and normalized
  • Recommendations and findings by the preparer of the report

Gilmore Jasion Mahler (GJM) consulting and assurance partner Greg Taylor leads the GJM Private Equity Advisory practice and advises many businesses. He views the quality of earnings report as an opportunity to discover any “skeletons in the closet” before due diligence is performed by a potential buyer. Taylor says in the past most Q of E reports were strictly buy-side but in the past few years, he says he’s seen more companies also performing sell-side in preparation for a sale. Many investment bankers are also strongly recommending a Q of E report be performed before they will take the company to market. One thing that hasn’t changed: Q of E reports are frequently prepared by an independent third-party firm.

“Buyers usually want independent parties to perform this analysis for a couple of reasons,” says Taylor. “One: another party is taking an independent look and two: these reports can also be provided to third parties for funding or investment reasons.”

Key Questions

Taylor says there are three key questions business owners should ask themselves when reviewing a Q of E with their financial team and advisors:

  1. How accurate are the management proposed addbacks? 
  2. How sustainable are the numbers? 
  3. What are other factors that are not just in the numbers, but the intangibles? For example: the management team, market trends and operational expertise.

CEO Perspective

Findlay-based Rowmark is a leading global manufacturer of sheet plastic for many uses, including signage, awards and other applications. President and CEO Jim Ellward says the company continues to stay active in many acquisitions, and a Q of E report is an important component when exploring any potential acquisition. He has worked with GJM to provide the report to Rowmark when needed.

“You have to have confidence in that third-party advisor that they are going to focus on the details, point out the positive and negative aspects of the business through their findings and truly be that advisor,” says Ellward. “GJM has earned our confidence and we view them as a trusted partner with our business.”

In fact, selecting a professional or firm to provide a quality of earnings report may be equally as important as the report itself. Many firms provide Q of Es, but not all are experts. Ellward says GJM is the right partner for Rowmark.

“Gilmore Jasion Mahler understands our business,” he says.  “They have taken the time to learn our business and understand our long-term strategy. This, coupled with their accuracy, attentive service and fact-based assessments, allows us to feel confident with the information and guidance we are able to attain from the Q of E reports.”

Sometimes a Q of E report brings answers a business owner may not be hoping for, but they wind up being the answers that will guide the business in the right direction. Ellward described once such scenario for Rowmark.

“GJM helped us assess a recent potential acquisition that we ultimately decided to pass on as we moved deeper through diligence. Our decision to exit was based on multiple factors regarding the overall health of the business. The Q of E provided the basis of additional questions that we wanted to dive deeper into understanding and in turn allowed us to identify areas of concern and focus on making the right decision for the business.”

Here’s what Ellward says he looks for in a Q of E report:

  • A more detailed picture of just how well the business is really doing and whether or not it is worth the price negotiated
  • The analysis of customer sales and accounts
  • The identification of any significant or unusual accounting adjustments or policies that need explanation
  • The ability to see an independent, non-biased view evaluating the on-going operations and cash flows  

As this information bubbles up in a Q of E report, the answer often becomes very clear whether it is wise to move forward with the transaction or to walk away and wait for the next opportunity to arise.  

Established in 1996, GJM is the largest public accounting firm in Northwest Ohio, with offices in Maumee and Findlay. Locally owned, GJM offers cloud-based accounting and provides comprehensive services including assurance, business advisory, tax, risk advisory, healthcare management and outsourced accounting. The Firm’s professionals specialize in industries including construction & real estate, healthcare, manufacturing & distribution and utilities.

Is Telemedicine the Way to Move Forward in a Pandemic (and Beyond)?

During the COVID-19 pandemic, we've seen an unprecedented number of doctors and nurses turn to telemedicine for the first time. While in this case necessity is the mother of invention, the convenience and efficiency of telemedicine have made it truly invaluable to medical professionals around the globe in these unprecedented times. With people realizing how easy and often straightforward it is to telecommute in the medical field, its use will surely continue far into the post-COVID-19 era.

Many patients find the use of telemedicine to be convenient, as they get to avoid traveling long distances, or sitting in waiting rooms rather than in their favorite chair. This also helps homebound patients and those who can’t take significant time off work for an in-person appointment. In many cases, it’s also more effective for the medical professionals who care for patients.

Here are just some of the benefits being observed in recent months:

  • Triage for patients can be done virtually. Telemedicine offers a more efficient way to screen who needs to physically visit the office versus those who are able to teleconference into their physician's office. Waiting rooms can be used for the more critical patients who require in-person care. This instantly streamlines the entire intake process for any medical facility. Additionally, it requires fewer staff members to be on duty at any given time, simpler payroll, and simpler accounting across the board.
  • Once successfully implemented, telemedicine saves time. Virtual care can take less time for medical professionals and patients alike, so it can often be a fast and effective way to provide care. It also reduces the impact of no-show patients significantly. This allows professionals to treat more patients in a given day, which is good for any practice, along with the communities they serve.
  • The potential savings for medical practices are huge. For one, virtual care can have far less overhead than in-person care and potentially much less environmental impact. Billing can be done both automatically and virtually, with the click of a button. HIPAA-compliant billing and electronic data storage also reduce costs for providers. Telemedicine also provides savings opportunities for patients and insurance companies alike, as it could cut down on unnecessary emergency room visits and transportation costs, among other expenses.
  • Telemedicine increases the potential reach for patients.  In most places, rural patients experience longer wait times for appointments and longer commutes, both of which create a disparity in care that can even be life-threatening. The ability to serve rural communities remotely not only allows you to expand your patient base, but also provides an important service to those underserved communities.

Gilmore Jasion Mahler’s Healthcare Specialist Team assists many medical practices with their accounting needs, including practice management, outsourced accounting, and other advisory services, such as the rapid transition to telemedicine during the COVID-19 pandemic. One such practice, Sylvan Lakes Family Physicians in Sylvania, had GJM in their corner as they moved quickly to adapt to the telemedicine environment during the COVID-19 pandemic and stay at home orders in Ohio and Michigan. They knew patients weren’t going to be able to come to them, so telemedicine was a necessity.

“Our GJM team was right there with us giving suggestions and providing support, says Sylvan Lakes practice manager Sandy Johnson, MA. “GJM is not just our accountant, they’re more than that to us. In fact, probably the most critical role they played during this pandemic was getting our Small Business Administration Paycheck Protection Program (PPP) loan secured. They did all the work to make it happen and we know they’re here to guide us through the entire process. It’s a great relationship.”   

The COVID-19 pandemic has brought about many changes. Working from home and the use of technology to stay connected, both personally and professionally, is now the norm. We may find that we’re not going back to the “old” way of doing things. Sometimes an in-person doctor’s appointment is appropriate, but we may find that moving forward telemedicine becomes the standard practice in many instances.  

Johnson says she can see that there’s a role for telemedicine, but she’s not sure every situation is appropriate for telehealth. For example, she says, caring for a diabetic patient via telemedicine would be difficult. It’s tough, she says, to replace that in-person contact. At Sylvan Lakes Family Physicians, she says their bottom line is important, as with any medical practice, but when it comes down to it, their mantra is: “Patients first, financial second.”

Learn more about GJM’s Healthcare Specialist Team and how they can help your medical practice grow. You can also sign up to receive GJM’s quarterly newsletter Practice Management Advisor to stay on top of issues impacting healthcare practices.

Established in 1996, Gilmore Jasion Mahler, LTD (GJM) is the largest public accounting firm in Northwest Ohio, with offices in Maumee and Findlay. Locally owned, GJM offers cloud-based accounting and provides comprehensive services including assurance, business advisory, tax, risk advisory, healthcare management and outsourced accounting. The Firm’s professionals specialize in industries including construction & real estate, healthcare, manufacturing & distribution and utilities.    

Jamie Dixon Takes on New Role With GJM

Gilmore Jasion Mahler (GJM) is pleased to announce that Jamie Dixon, CPA has been named as firm administrator. 

Already a member of the firm’s leadership team and Healthcare Specialist Team, Jamie’s new management role will include oversight of GJM firm operations, management reports and budgets as a critical member of the executive team for both the Maumee and Findlay offices. He joined GJM in April of 2013. 

Jamie’s professional expertise as a CPA is home health and long-term care. He has over thirty years of experience in both private and public accounting, providing consulting services to home health, hospice, skilled nursing facilities, intermediate care facilities for individuals with intellectual disabilities (ICFIID), federally qualified health centers (FQHCs) and other healthcare entities. He consults frequently on Medicare and Medicaid reimbursement and cost report issues. Jamie will continue his client work in addition to his new leadership role.  

“I’m excited to take on this new challenge and expand my leadership role with the firm,” says Dixon. “I’ve developed strong relationships with many of my clients and am pleased to be able to continue to be there for them as well.”

GJM Managing Partner Kevin Gilmore says he’s confident Dixon will excel in his new position.

“No question, it’s an unusual time to take on a new role, as we all struggle with the pandemic and its impact on all of our lives, both personally and professionally. Jamie is a calm, capable leader and I have no doubt he will do an outstanding job as GJM’s new firm administrator.”   

Dixon has already assumed his new duties.

Established in 1996, Gilmore Jasion Mahler, LTD (GJM) is the largest public accounting firm in Northwest Ohio, with offices in Maumee and Findlay. Locally owned, GJM offers cloud-based accounting and provides comprehensive services including assurance, business advisory, tax, risk advisory, healthcare management and outsourced accounting. The Firm’s professionals specialize in industries including construction & real estate, healthcare, manufacturing & distribution and utilities.

SBA Releases PPP Loan Forgiveness Application

The Small Business Administration (SBA) has released the application for Paycheck Protection Program (PPP) loan forgiveness. The 11-page application includes instructions and worksheets to guide businesses through the process. The application and instructions also clarify some requirements and options for businesses requesting forgiveness of their PPP loans, including:

  • The FTE (full time equivalent) calculation is based on a 40-hour work week.  No person can be considered greater than a 1.0 FTE.  For those employees working less than 40 hours per week, the calculation can be based on a 40-hour week rounded to the nearest 0.1 or they can all be considered as .5 FTE’s. 
  • Businesses can calculate their payroll costs through an “alternative payroll covered period” that aligns with their own payroll schedule. This “alternative” period is only available to borrowers with a bi-weekly (or more frequent pay period like weekly), not semi-monthly or monthly pay periods. 
  • There’s a new exception from the loan forgiveness reduction for businesses that have made a (1) written offer to rehire workers which was rejected by the employee and (2) any employees who during the covered period (a) were fired for cause, (b) voluntarily resigned, or (c) voluntarily requested and received a reduction of their hours.   
  • FTE Reduction Safe Harbor if FTE employee levels are restored to February 15th staffing levels by no later than June 30, 2020.

Further guidance is expected soon to help businesses and their lenders navigate the application for loan forgiveness. You can access the SBA PPP loan forgiveness application here. We will be sure to communicate further updates as more guidance becomes available.

Established in 1996, Gilmore Jasion Mahler, LTD (GJM) is the largest public accounting firm in Northwest Ohio, with offices in Maumee and Findlay. Locally owned, GJM offers cloud-based accounting and provides comprehensive services including assurance, business advisory, tax, risk advisory, healthcare management and outsourced accounting. The Firm’s professionals specialize in industries including construction & real estate, healthcare, manufacturing & distribution and utilities.

PPP Loan Forgiveness: Waiting for Answers

PPP Loan forgivenessJust over a week ago, the Internal Revenue Service (IRS) released an opinion on the deductibility of expenses relating to the forgiveness of Paycheck Protection Program (PPP) loans (IRS Notice 2020-32).  When Congress passed the CARES Act in March establishing the PPP, the legislation stated that any portion of the loans that were forgiven would be non-taxable income for taxpayers.

Many of us speculated that the IRS would follow their statutes and rule that though the forgiven income is non-taxable, the payroll, health and retirement benefits, rent, utilities and interest expense that qualify for the loan forgiveness would be deemed non-deductible. Indeed, this is exactly how the IRS ruled in the notice, stating that, as the expenses would relate to non-taxable income, they would in turn not be deductible.

Along with many taxpayers, several legislators in Congress are very upset about the ruling and feel that it is not in line with their legislative intent. They would like Treasury Secretary Steven Mnuchin to reverse the IRS position. In the alternative, the legislators plan to introduce legislation to mandate these expenses be allowed as tax deductible, as their intent was to make this program very generous. This would also be consistent with the tax treatment of an alternative option in the same law, the employee retention credit.

We will wait and see in the coming months how this plays out. In the meantime, it is expected that within the next week or so, we should be receiving some much-needed guidance from the Small Business Administration (SBA) on numerous PPP loan forgiveness questions. Among them are the following.

  1. Will costs such as payroll only be allowed if paid during the 8-week period after loan funding or will we be able to include payroll paid after the 8-week period that relates to work done during the 8 weeks?
  2. For loans funded after May 6th, will taxpayers be able to extend their 8 weeks beyond June 30th?
  3. Will any restrictions be made on self-rental properties?
  4. How are FTE’s (full time equivalent employees) being calculated?
  5. What exactly does it mean to have your workforce restored by June 30th if they were not restored during the 8-week period in order to get loan forgiveness? How long do they need to stay on the payroll?
  6. Are there any restrictions on hiring and paying family during the 8-week period?
  7. Is interest on non-mortgage debt allowed?
  8. What retirement benefits will be allowed? Do they need to be paid during the 8-week period in order to be forgiven? Will payment of an accrued liability from the prior year qualify for loan forgiveness?

These are just a few of several questions that have been asked with no clear guidance on PPP loan forgiveness. Hopefully, we will have that soon. We continue to recommend that PPP borrowers make a good faith effort in determining cost eligible for forgiveness. 

As new information comes forth, its critical that you work closely with your trusted advisors so you’re able to make the best decisions to position your business to emerge from the pandemic in as healthy a position as possible.

Kevin GilmoreGilmore Jasion Mahler Managing Partner Kevin Gilmore provided this blog. For more information on the impact of the pandemic on your business, we encourage you to visit the GJM COVID-19 Resource Center.

Established in 1996, Gilmore Jasion Mahler, LTD (GJM) is the largest public accounting firm in Northwest Ohio, with offices in Maumee and Findlay. Locally owned, GJM offers cloud-based accounting and provides comprehensive services including assurance, business advisory, tax, risk advisory, healthcare management and outsourced accounting. The Firm’s professionals specialize in industries including construction & real estate, healthcare, manufacturing & distribution and utilities.