The buyer's Quality of Earnings firm is flagging our historical inventory adjustments as a sign of weak financial controls and wants to adjust our EBITDA downward. How do we defend these adjustments to protect our enterprise value?

Question

Tyler Smith · Accepted Answer

When a buy-side Quality of Earnings provider targets historical inventory adjustments, they are trying to prove your financial reporting is unreliable so they can justify a lower valuation. To defend against this, do not get defensive or emotional. Instead, use a structured, data-driven approach.

First, clearly separate systemic adjustments from true, one-time accounting cleanups. If the adjustments were the result of a deliberate, one-time transition to a more accurate inventory management system, document this project as a strategic operational investment. Treat this transition as a completed Rock that permanently institutionalizes your accounting practices.

Second, provide the QofE auditors with a granular reconciliation ledger. Show them that the adjusted figures are not random fluctuations, but rather a predictable correction that aligns with your current, more accurate operating model. Presenting this with absolute transparency helps build trust under the Trust Equation, showing high reliability and low self-orientation.

Finally, work with your internal finance team to implement a continuous monthly reconciliation process immediately. If you can show three to six months of perfectly clean, unadjusted inventory metrics leading up to the final close, you prove the historical volatility is a legacy issue rather than an ongoing operational risk. This preserves your EBITDA and keeps the original enterprise value intact.