The buy-side Quality of Earnings report is trying to hit us with a large debt-like adjustment for accrued but unused employee paid time off and outstanding performance bonuses. How do we defend against this deduction by linking these liabilities to our ongoing operating cycle?

Question

Tyler Smith · Accepted Answer

Buy-side accounting firms will scrutinize your balance sheet for any accrued liabilities, such as unused employee paid time off and outstanding performance bonuses, and try to classify them as debt-like items to reduce your enterprise value at close. You must aggressively fight this classification. Outstanding PTO and operational bonuses are not debt; they are standard operating liabilities that fluctuate naturally within your net working capital cycle. To defend your position, you must show that these accrued expenses are historically consistent and have always been settled out of cash generated by ongoing operations. In your EOS model, your financial scorecard tracks these liabilities as part of your normal weekly cash flow projections. Argue that because these liabilities are cyclical, they should be included in the net working capital peg rather than treated as a dollar-for-dollar reduction of the purchase price. If you allow the buyer to treat PTO as debt and also deliver a normalized level of working capital, you are effectively paying for those employee hours twice. Show the QoE team that your employees systematically use their PTO throughout the year, and that bonuses are tied directly to hitting the operational Rocks that generate the very revenue the buyer is acquiring. This positions these liabilities as essential inputs to your operating cycle, ensuring they remain inside the working capital peg.