Operational Assessment Before You Sell

August 22, 2023 | by Keith Yeater

The Power of a Quality of Operations Proposal in Maximizing Bid Price for Private Equity Firms

When private equity firms sell a company, they usually do a financial analysis called a Quality of Earnings (Q of E) proposal. This verifies the legitimacy of earnings and adjusts for any one-time expenses that might distort future profitability. But many private equity firms overlook the potential value of a Quality of Operations (Q of O) proposal and its role in both creating excitement and increasing overall credibility for the company you are preparing to sell.

Here’s how a Q of O proposal can maximize the initial bid amount of whatever business is slated for sale, no matter the industry.

Where a Q of E focuses on the numbers, a Q of O looks at the operational side of the business, identifying areas of strength and improvement, and uncovering potential growth opportunities. By examining key operational functions, like best-in-class processes and inventory turnover, a Q of O assessment provides valuable insights into the company’s operational potential.

The Power of the Q of O

Including a Q of O proposal in the Confidential Information Memorandum (CIM) gives all potential buyers access to the same accurate and comprehensive operational information. This adds credibility and transparency to the bid process. By clearly highlighting the company’s operational strengths, areas for improvement, and potential opportunities, private equity firms can drive up the perceived value of the company.

One of the significant advantages of a Q of O proposal is its ability to demonstrate the potential for future earnings growth. By identifying specific operational improvements that could lead to increased earnings, private equity firms can leverage this potential when negotiating the bid price. For example, if the Q of O assessment reveals that implementing a best-in-class management system could yield substantial benefits, it can be used as a bargaining tool to justify a higher bid price.

A Real Estate Comparison

If we look at it in terms of its analog in the real estate world, if a Q of E assessment is like a home inspection, a Q of O is the staging within the home that takes place before the first potential buyers walk through the door. While selling companies’ operational overviews are commonly viewed with some skepticism, a Q of O proposal from a trusted third-party provides potential buyers with accurate and reliable details about the company’s operational potential. This creates a more favorable perception of the company, enhancing its overall appeal and value.

Maximizing the Sale

Private equity firms have long recognized the importance of conducting a Q of E proposal before any sale. But by incorporating a Q of O assessment as well, they can drive up the initial bid price and maximize the value of the company they are selling. Including a Q of O proposal in the CIM provides transparency, credibility, and a compelling case for potential buyers, ultimately leading to better returns across the board.

Next Steps

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