During our current Quality of Earnings audit, the buy-side firm is trying to adjust our historical EBITDA downward by criticizing our inventory valuation methods, claiming we have obsolete stock that should have been written off years ago. How do we defend our inventory valuations to preserve our run-rate EBITDA?

Question

Tyler Smith · Accepted Answer

Quality of Earnings, or QofE, auditors are hired to find reasons to chip away at your EBITDA. Inventory obsolescence is one of their favorite targets because it allows them to take a retrospective write-down, which directly lowers your historical earnings and therefore your purchase price. To defend your numbers, you cannot rely on casual explanations. You must present a systematic, data-driven defense. Begin by showing them your documented inventory management processes. If your leadership team uses a clear weekly scorecard to track inventory turns and slow-moving items, bring that data to the table. Prove that your inventory valuation is not a subjective guess but a controlled, continuous operational process. Next, analyze their proposed adjustment. If the auditor is trying to write off inventory that you actually sold during the trailing twelve months, their argument is dead on arrival. Show the actual invoices. Furthermore, you must argue that any true write-off of obsolete inventory is a non-recurring, one-time adjustment rather than an ongoing operational expense that affects your future run-rate. If you run your operations using an operating system like EOS®, you should have quarterly Rocks and Level 10 Meeting™ archives that show exactly when and why certain inventory decisions were made. Having this level of operational transparency makes it incredibly difficult for buy-side auditors to claim your numbers are unreliable or that you lack control over your working capital.