When to Get a Business Valuation vs Quality of Earnings
Buying, selling, or investing in a business comes with big financial decisions. There are two tools that can assist with these decisions – a business valuation and a quality of earnings (QoE) report. A business valuation and a quality of earnings report are simple, but not the same. Knowing when to use each one can give you the confidence to make the best decisions for your business. Below, we discuss the benefits of each report and the best times to take advantage of them.
At Peak Business Valuation, we work with business owners, buyers, and investors across the nation. Our mission is to provide clear, concise, and reliable financial insights. Whether you need a business valuation to understand fair market value or a quality of earnings report through Ampleo (Peak’s parent company), our team is here to help. Schedule a free consultation today to get started.
What is a Business Valuation?
A business valuation answers the question: What is this business worth? By analyzing a business’s income history, assets, market condition, or business model, valuation experts can determine the economic value of your company. When valuing a business, certified appraisers use several approaches when determining fair market value:
- Income Approach: This valuation approach focuses on the business’s ability to generate future profits and the risks associated with it. Business appraisers assess projected earnings or cash flow, then discount them back to today’s value. It is especially useful for businesses with steady revenue and growth potential.
- Market Approach: The market approach compares similar companies that have recently sold. By analyzing sales prices, revenue multiples, or profit multiples, the appraiser can estimate what the market is willing to pay. It works well when there is solid data on comparable businesses in the same industry.
- Asset Approach: When valuing assets, business appraisers combine their value, then subtract liabilities. The asset approach includes valuing tangible assets (like property and equipment) as well as intangible assets (like patents or trademarks). This approach is often used for asset-heavy businesses or when income is unpredictable.
You may need a business valuation when:
- Selling your business and setting a fair asking price
- Buying a business and deciding what to offer
- Planning for taxes, succession, or legal matters
- Applying for a loan or raising investment money
- Issuing stock to employees
In short, a valuation shows the overall financial worth of the business.
What is a Quality of Earnings Report?
A quality of earnings (QoE) report goes beyond the raw numbers on financial statements. Instead of showing total profits, a QoE report evaluates how reliable, accurate, and sustainable those earnings are. Furthermore, this report is especially valuable during the due diligence period. With a QoE report, buyers, lenders, and investors can ensure a company’s earnings reflect its true financial health.
A QoE report reviews:
- Revenue Sources: Identifies where income is coming from and whether it is recurring, one-time, or seasonal. Consistent, recurring revenue streams can determine stronger indicators of long-term stability.
- Expenses: Differentiates between necessary operating expenses (like payroll and rent) versus non-recurring or discretionary costs. This helps determine the true profitability of ongoing operations.
- Customer Concentration Risks: Assesses whether the business depends too heavily on a few customers or contracts. If a major customer leaves, earnings could drop.
- Adjustments to Reported Profits: Normalizes earnings by removing unusual, non-recurring, or owner-specific items. Common examples are one-time legal fees, personal expenses, or non-operational income.
- Working Capital Trends: Reviews how much capital is tied up in operations. This analysis also helps you know whether the business generates enough cash flow to cover short-term obligations.
- Accounting Policies: Examines whether financial reporting methods are consistent and in line with standard practices. Doing so ensures earnings are not inflated by aggressive accounting.
By addressing these areas, a QoE report provides a clear, trustworthy picture of financial performance. For business owners, it can highlight strengths, expose hidden risks, and ultimately build buyer or investor confidence. Peak Business Valuation is here to help. Speak with a valuation expert at Peak Business Valuation today to learn if a QoE report is best for you.
Business Valuation vs Quality of Earnings
When looking at business valuation vs quality of earnings report, it is important to understand that there are distinct differences. Both reports provide financial insights, but they serve different purposes. For example, a business valuation shows value, while a QoE report confirms the stability of earnings. Moreover, valuations are often done at the start of a sale or purchase. QoE reports are usually conducted later during the due diligence period. Additionally, business valuations focus on overall worth and future expectations. QoE reports dig into past earnings and expenses in detail. Adjustments may depend on how a general or specific buyer would operate the business.
When to Use Each Report
Obtain a Business Valuation when:
- You want to sell and set a fair price
- You are buying and need to know what is reasonable
- You are handling estate planning, divorce, or partner disputes
- You need a valuation for financing or investors
Obtain a Quality of Earnings Report when:
- You are buying and want to check if earnings are reliable
- You are selling and want to build buyer confidence
- Investors want to verify financial performance before investing
Peak Business Valuation strives to help business owners make the best decisions for their business through accurate data. Our team of valuation experts can help identify the best way to value your business. Reach out today and schedule a free consultation!
How They Work Together
Although they have distinct differences, you do not always have to choose between a business valuation vs quality of earnings. Many times, they work best together. For example, sellers may start with a valuation to set the asking price, then provide a QoE report to reassure buyers. Additionally, buyers may use a valuation to decide on a price and then request a QoE before closing the deal. Together, they give a complete financial picture. The valuation shows what the business is worth, while the QoE confirms how dependable the earnings are.
Conclusion
Understanding business valuation vs quality of earnings is important for any transaction. With a business valuation, you can learn the value of the business. On the other hand, a QoE report shows if the reported earnings are accurate and sustainable. Using the right report—or both—can protect your investment and give you peace of mind.
At Peak Business Valuation, we provide professional valuations and can connect you with trusted partners for QoE reports. Schedule a free consultation today to see which service fits your needs.
