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. Common add backs can be interest payments, personal phones, personal travel, owner health insurance and salary. It is not unusual for agencies to have “some” non-recurring expenses every year, such as major officer repairs, potential lawsuit, etc. These non-recurring expenses should be considered when evaluating earnings. Beware of the business appraiser that restructures the earnings without “any” allowances for extraordinary items.
2. Sustainability of earnings after the acquisition
Two key questions a buyer considers when reviewing a seller's earnings are will they continue to grow at the previous rate and what percentage of attrition will occur when the seller leaves the organization.
3. Verification of information
The concern for a buyer is whether the information is accurate, timely, and relatively unbiased. Does the seller have documentation for the "add backs"? How are they reporting policy cancellations? Is the seller above-board, or are there skeletons in the closet?