By the time an owner is ready to sell, most of the price has already been decided. The hardest conversation in this profession is not telling an owner their business is worth less than they hoped. It is explaining that the decisions which produced that number were made years ago, and that the window to … Continue reading Exit Readiness Starts Years Before the Exit
Valuation Insights & Articles
Welcome to Valuation Insights & Articles, where Highland Global shares thought leadership, expert guidance, and commentary on the ever-evolving world of business valuation. Here, you’ll find practical insights tailored for SBA lenders, business owners, attorneys, and financial professionals. Topics include SBA 7(a) valuation standards, goodwill analysis, tax-related valuation, M&A strategy, litigation support, and valuation methodology best practices. Stay informed with clear, actionable content rooted in real-world experience and regulatory knowledge.
A New Layer of SBA Financial Due Diligence
Quality of Earnings has officially entered the SBA lending conversation. With SOP 50 10 8.1 now effective, Quality of Earnings—or QoE—has become an important component of financial due diligence for qualifying SBA acquisition transactions. But what exactly is a Quality of Earnings analysis? At its core, a QoE asks a question that financial statements alone … Continue reading A New Layer of SBA Financial Due Diligence
A Business Valuation and a QoE Are Not the Same Thing
One of the most important distinctions under the new SBA framework is this: a business valuation and a Quality of Earnings analysis answer two very different questions. The valuation asks what the business is worth. The Quality of Earnings analysis asks how reliable the earnings supporting the transaction are. A business valuation considers expected economic … Continue reading A Business Valuation and a QoE Are Not the Same Thing
Cash Proof: Follow the Money
One of the most significant elements of the SBA Quality of Earnings requirement may also be one of the most revealing: Cash Proof. Financial statements tell us what the accounting records say happened. Tax returns tell us what was reported to the government. Bank statements tell us where the money actually went. A Cash Proof … Continue reading Cash Proof: Follow the Money
The Add-Back Question
Few areas of a business acquisition generate more discussion than seller add-backs. Some are entirely legitimate. Some require judgment. Some should never have been added back in the first place. A Quality of Earnings analysis should not simply accept a schedule of adjustments because it was included in the offering memorandum or provided by the … Continue reading The Add-Back Question
Reported Earnings Are the Beginning, Not the Conclusion
A company's income statement may report $1 million of earnings. That does not necessarily mean the business generates $1 million of sustainable earnings. Quality of Earnings analysis is about understanding the difference. Reported results may include a one-time customer contract, an unusually profitable project, deferred maintenance, below-market rent paid to a related party, above- or … Continue reading Reported Earnings Are the Beginning, Not the Conclusion
Revenue Quality Matters Too
Quality of Earnings is not only about expenses. Sometimes the greater risk is on the revenue side of the income statement. Consider two businesses generating identical annual revenue. Business A has hundreds of recurring customers, diversified across industries and geography. Business B generates 45% of its revenue from one customer whose contract expires six months … Continue reading Revenue Quality Matters Too
Independence Matters
Quality of Earnings is not supposed to be another version of the seller's financial presentation. Its value comes from independence. The seller naturally wants to present the business in the strongest possible light. The buyer wants confidence that the business can perform after closing. The lender has a different responsibility: it must determine whether the … Continue reading Independence Matters
Owner Compensation: The Add-Back That Isn’t Always an Add-Back
One of the most common adjustments in a business acquisition is owner compensation. The seller may earn $250,000, and the buyer may be told to add it all back. Sometimes that is appropriate. Sometimes it is not. The real question is not whether the seller's compensation disappears after closing. The real question is who will … Continue reading Owner Compensation: The Add-Back That Isn’t Always an Add-Back
Related-Party Rent: What Would the Business Really Pay?
Related-party rent is another area where reported earnings can be misleading. Consider a company operating from real estate owned personally by the seller. The business pays $4,000 per month, while market rent is $9,000. Reported earnings therefore benefit from a $60,000 annual expense advantage that may disappear after closing. The opposite can happen too. A … Continue reading Related-Party Rent: What Would the Business Really Pay?