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logologologo
  • Home
  • About
    • Our Process
    • Why I wrote the book on Being a Business Broker
    • Who is Ed Legum?
    • Getting Started
    • Careers
  • Selling
    • Seller Registration
    • How To Sell Your Business
    • Valuation
    • Industries
    • Download Free Whitepaper
    • Financing the Deal
    • Seller FAQ
    • Sellers Blog
  • Buying
    • Buyer Registration
    • How To Buy A Business
    • Financing the Deal
    • Buyer FAQ
    • Buyers Blog
  • Contact
  • Home
  • About
    • Our Process
    • Why I wrote the book on Being a Business Broker
    • Who is Ed Legum?
    • Getting Started
    • Careers
  • Selling
    • Seller Registration
    • How To Sell Your Business
    • Valuation
    • Industries
    • Download Free Whitepaper
    • Financing the Deal
    • Seller FAQ
    • Sellers Blog
  • Buying
    • Buyer Registration
    • How To Buy A Business
    • Financing the Deal
    • Buyer FAQ
    • Buyers Blog
  • Contact
July 21, 2014 by Edmond Legum Buyer Articles, Valuation 0 comments

Three Basic Factors of Earnings

Two businesses for sale could report the same numeric value for “earnings” and yet be far from equal. Three factors of earnings are listed below that tell more about the earnings than just the number.

1. Quality of earnings
Quality of earnings measures whether the earnings are padded with a lot of “add backs” or one-time events, such as a sale of real estate, resulting in an earnings figure which does not accurately reflect the true earning power of the company’s operations. It is not unusual for companies to have “some” non-recurring expenses every year, whether for a new roof on the plant, a hefty lawsuit, a write-down of inventory, etc. Beware of the business appraiser that restructures the earnings without “any” allowances for extraordinary items.

2. Sustainability of earnings after the acquisition
The key question a buyer often considers is whether he or she is acquiring a company at the apex of its business cycle or if the earnings will continue to grow at the previous rate.

3. Verification of information
The concern for the buyer is whether the information is accurate, timely, and relatively unbiased. Has the company allowed for possible product returns or allowed for uncollectable receivables? Is the seller above-board, or are there skeletons in the closet?

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