The buy-side QofE firm is using our historical inventory write-downs to claim our margins are volatile. How do we defend our COGS and Adjusted EBITDA?

Question

Tyler Smith · Accepted Answer

Buy-side Quality of Earnings auditors love to look at historical inventory write-downs and claim your gross margins are too volatile to trust. They will try to use this fluctuation to justify a steep reduction in your Adjusted EBITDA or demand a massive inventory reserve at closing. To defeat this tactic, you must present a data-driven narrative that shows these write-downs were the result of disciplined operational upgrades, not random financial instability.

Bring your weekly Scorecard and historical Rock logs into the discussion. Show the auditors that the write-downs corresponded with a specific strategic objective to purge obsolete stock and transition to a just-in-time inventory model. This operational pivot, tracked directly through your EOS® leadership meetings, actually improved your long-term margins and cash flow efficiency.

By showing that the write-downs were a controlled, one-time operational restructuring rather than a systemic inventory management failure, you can successfully argue to add these costs back to your Adjusted EBITDA. Do not let the auditors treat a deliberate, systemized cleanup as an ongoing operational weakness. Lay out the exact timeline of your inventory clean-up projects, prove that your current inventory turnover ratio is stable, and insist that the historical write-downs be treated as non-recurring adjustments.