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Prospective investors recognize the direct link between business operations and financial performance. EBITDA, cash and revenue are all attributed to underlying process flows and business operations, despite being financial, not operational, metrics.
Even so, middle-market investors have historically relied on traditional accounting due diligence to understand earnings and financial performance by solely using quality of earnings—or QOE—reports. In the early 2000s, however, the investment industry started to put more emphasis on operations and value enhancement, recognizing that financial engineering alone could not deliver required returns.
Quality of Operations, the TriVista process also known as operational due diligence analysis, is now becoming an important additional requirement prior to most transactions. Investors value QOO as much, if not more, than its financial counterpart.
Is Quality of Earnings Still Important?
There is no single definition of QOE, and no agreed-upon industry standard. QOE’s roots trace back to the 1970s and 80s, when professional investors needed to ascertain company valuations based on true earnings, not accounting anomalies. At that time, the industry lacked a universal objective measurement.
Mike McSweeney is a senior vice president of TriVista, where he leads the firm’s Food, Beverage and Consumables practice and is a member of its Global Executive Leadership Team. He is responsible for TriVista’s worldwide sales, marketing and business development activities.