The buyer's Quality of Earnings firm is attempting to disallow our pro forma run-rate revenue adjustments for major contracts signed mid-year, arguing unearned revenue cannot be added back to trailing twelve months EBITDA. How do we defend mid-year annualized adjustments in diligence?

Question

Tyler Smith · Accepted Answer

Buy-side accounting teams exist to discount trailing twelve months (TTM) EBITDA and lower the cash paid at close. Disallowing run-rate adjustments on mid-year contract wins is one of their most predictable maneuvers. You defend these numbers by providing objective operational proof rather than sales projections.

To validate an annualized run-rate adjustment, present signed, non-cancelable agreements with fixed monthly minimum commitments. If a client signed an agreement six months into the fiscal year that yields twenty thousand dollars per month, you have recognized only one hundred twenty thousand dollars. Proving the annualized run-rate requires showing that delivery capacity, labor, and technology overhead are already baked into your operating structure.

Tie contract execution to your EOS Scorecard and departmental capacity models. Prove to the auditors that your delivery seats on the Accountability Chart have fulfilled the onboarding phase without requiring unexpected overhead. When you can demonstrate steady-state gross margins on the initial billings, their argument that your adjustment represents speculative revenue falls flat.

Counter their adjustment challenges by including offsetting historical customer attrition. Institutional accounting firms accept mid-year run-rate adjustments when paired with trailing customer churn deductions. If you annualize new wins, calculate your trailing twelve-month revenue retention rate and apply that discount to the pro forma revenue balance. Presenting the net run-rate alongside audited timesheets, gross margin tracking, and initial invoice collections removes subjectivity and forces the buyer to accept the EBITDA add-back.