During the Quality of Earnings audit, the buyer's team is trying to include our accrued bonuses and property taxes in both the net working capital peg and as direct debt-like reductions to the purchase price. How do we eliminate this double dipping?

Question

Tyler Smith · Accepted Answer

Buy-side Quality of Earnings auditors are notorious for double dipping on accrued expenses. They will look at balance sheet items like accrued employee bonuses, unpaid property taxes, or accrued vacation days and demand that these be treated as debt-like liabilities. This means they want a dollar-for-dollar reduction in your cash proceeds at closing, while simultaneously leaving those same liabilities inside your net working capital calculation. If you allow this, you are paying for the exact same liability twice. To eliminate this double dip, you must establish a clear, non-negotiable line of demarcation in your letter of intent. Any financial liability that is classified as debt or a debt-like item must be completely excluded from your net working capital calculation. During your preparation sessions, review your historical balance sheet with your financial team. Ensure that your accrued expenses are consistently treated according to GAAP principles. If an item has historically been part of your normal operating working capital cycle, it belongs in the net working capital peg, not as a direct purchase price reduction. Use your weekly Level 10 Meeting™ to keep your internal finance leader focused on this task. Show the buyer's auditors the historical consistency of these accruals. Proving that these expenses are part of your business's standard breathing rhythm prevents the buyer from using standard accounting entries to steal your equity at the closing table.