We launched a new product line six months ago that is highly profitable, but the buyer's QofE team refuses to annualize this revenue, insisting on historical trailing twelve months. How do we defend these pro forma adjustments?

Question

Tyler Smith · Accepted Answer

A buy-side Quality of Earnings team will almost always stick to historical trailing twelve-month numbers because it minimizes their risk. However, ignoring a highly profitable, established new product line unfairly discounts your current run-rate. To defend your pro forma adjustments, you must present a rigorous, data-driven analysis of this new revenue stream.

Under IVS 105, the capitalization of earnings method allows for the adjustments of historical figures to reflect normalized, ongoing operations. Show that your new product line is not a temporary spike but a sustainable business unit with predictable customer demand. Provide clear evidence of your recurring customer contracts, customer onboarding pipelines, and stable gross margins.

Use your leadership team's quarterly Rock tracking to show how operational workflows have been adjusted to support this product line efficiently. If you can prove that the operational capacity is fully built out and requires no further capital expenditure to maintain, you have a strong argument that these earnings are normalized and should be annualized. Presenting this clear operational data forces the QofE team to recognize your true run-rate profitability.