Earnings vs The People Reporting Them

Buyers and lenders will spend five to six figures on a Quality of Earnings report and sometimes five to six minutes Googling the people who produced those earnings.

Seems backwards.

In February, prosecutors charged two former Mobileum executives with manipulating company financials before its $915 million sale. The indictment alleges that they manufactured millions of dollars in revenue and created fictitious invoices when the buyer questioned the company’s high unbilled revenue. Mobileum later filed for bankruptcy.

I am not suggesting that a background investigation would necessarily have uncovered the scheme, but at least take a look. The case is a good reminder that earnings do not exist apart from the people reporting them.

The same people are making accounting decisions, building projections, describing customer relationships and answering diligence questions. In many deals, they will remain after closing and be expected to deliver the investment thesis.

We should spend more time examining Quality of People.

That means looking at what the resume leaves out. Litigation history. Prior deals and how they worked out. Not a database pull, a real look.

The purpose is not to find a reason to kill a good deal. It is to better understand the people risk while there is still time to do something about it.

QoE helps buyers understand the earnings.
QoP helps answer another question: Who are you really dealing with?