The M&A market continues to be red hot with buyers competing for deals and sellers benefiting in the process. So, owners and operators looking for a buyer need to get their company ready for a sale. But how?

Deal professionals will very often encourage sellers to get a quality of earnings One of the most frequent questions from someone looking to sell their business is about the quality of earnings report.

"A lot of the times they think it's an audit. It's not an audit. A lot of times they think it's a valuation. It's not a valuation either," says Tony Montanaro, a partner with Louis Plung & Co.

A quality of earnings report, what most often is referred to as a Q of E report, is an attempt to understand the true cash flow of the business on a go-forward, sustainable basis. Business valuations and audits are more backwards-looking analysis and assessment.

The focus when doing a Q of E report is to first identify the true cash flow that the business is generating. And then, look for potential items that could derail the sales process. But the report serves another purpose: the opportunity for a seller to tell their story.

"One of the big risk areas is these unknowns — what (buyers) don't know. So, this gives us just another opportunity to identify those potential issues and to really provide the story around those items."

Another one of the big goals of a Q of E report is to identify anything unusual on the company's books — non-recurring items, for example, that going to have an impact on the company's revenue stream. It's going to look at, in part, sales and expense trends over a two- to three-year time frame; significant accounting policies and whether those are appropriate; out-of-period revenue and expenses and how that impacts profitability for each year; and it's going to deep dive into customer sales, and accounts receivable collections.

"We want to make sure during a Q of E that this represents the true earnings of the business."

Montanaro spoke on the Smart Business Dealmakers Podcast, offering a look at deals from a buyer's perspective: what they like to see in diligence that speeds a deal to close, and what they don't like to find — problems that could mean they walk away.