We are preparing for a sell-side Quality of Earnings review and our revenue is based on multi-year software-as-a-service and implementation bundles. How do we clean up our ASC 606 revenue recognition policies beforehand to ensure the auditor does not write down our historical EBITDA and destroy our valuation multiple?

Question

Tyler Smith · Accepted Answer

If you bundle software and services, a buy-side Quality of Earnings auditor will look closely at your revenue recognition policies under ASC 606. If you have been booking the entire contract value upfront rather than carving out and deferring the implementation or maintenance portions, the auditor will restate your historical revenue. This will defer your EBITDA into future periods, which directly shrinks your enterprise value at your current multiple. To defend your valuation, you must conduct a thorough internal review before launching your sale process. Identify each distinct performance obligation within your multi-year contracts. Clearly separate software licenses, setup fees, and ongoing support services. Assign a standalone selling price to each component. If your internal team does not have the capacity, utilize your EOS Accountability Chart to delegate this cleanup to an external transactional accounting expert. Review the progress during your weekly Level 10 Meeting to keep this critical rock on track. Presenting clean, ASC 606 compliant financials shows buyers that your operations are professional and reduces their perceived risk. By taking control of the narrative before the buy-side auditor starts their work, you protect your adjusted EBITDA and keep your target valuation intact.