The buyer's Quality of Earnings report is proposing a massive negative adjustment to our historical EBITDA because we changed our revenue recognition policy two years ago. How do we counter this technical adjustment to protect our enterprise value?

Question

Tyler Smith · Accepted Answer

A change in accounting policies is an easy target for buy-side Quality of Earnings auditors looking to write down your historical EBITDA. If you transitioned from cash-basis to accrual-basis accounting, or altered how you recognize deferred revenue, the auditors will try to claim your prior years' earnings were artificially inflated. To counter this, you must present a clean, restated historical financial bridge. This means you must manually recalculate your financial statements for the last three years using the exact same revenue recognition methodology you use today. This side-by-side comparison eliminates the timing mismatches that the auditors are trying to exploit. It proves that the total cash collected and value delivered remain unchanged, and that the adjustment is merely a paper timing issue rather than an operational deficit. Bring this issue to your leadership team's Level 10 Meeting and have your financial seat leader work with a specialized sell-side CPA firm to validate your restated numbers before the buyer's team writes their final report. This proactive defense is critical because every dollar of negative EBITDA adjustment can translate to five or six dollars lost in your final enterprise value. By presenting a professional, restated historical bridge, you neutralize the auditor's technical arguments and protect your purchase price.