There are three basic factors that can make a big impact on your company’s bottom line: revenue, costs, and profits. Let’s take a closer look at each one.
- Quality of earnings
Understanding quality of earnings- or how accurately the earnings reflect the company’s true earning power. Beware of business appraisers that try to pad the earnings figure with one-time events- these are not accurate reflections of the company’s operations. Non-recurring expenses are normal for businesses, so make sure you allow for them when appraising a company.
- Sustainability of earnings after the acquisition
Will the earnings continue to grow at the previous rate? There are a few factors you’ll want to keep in mind when trying to answer this question. For example, you’ll want to consider the company’s business cycle and how it’s currently performing. Additionally, you should look at any major changes that may be taking place within the industry as a whole. By keeping these factors in mind, you’ll be able to get a better idea of whether or not the earnings are sustainable.
- Verification of information
One of the key things you need to look at is the company’s financial stability. Make sure that the company is able to verify its information, and has allowed for product returns and uncollectible receivables. You also want to make sure that the company is reputable and doesn’t have any skeletons in the closet.