During our buy-side Quality of Earnings review, the buyer's accountants are trying to classify our accrued vacation, long-term customer loyalty liabilities, and equipment warranties as debt-like items instead of working capital, which directly reduces our cash at close. How do we defend these balance sheet items to keep them in working capital?

Question

Tyler Smith · Accepted Answer

Buy-side Quality of Earnings auditors are paid to find reasons to chip away at your purchase price. One of their favorite tactics is to reclassify working capital accounts as debt-like items. If they succeed in moving things like accrued PTO, deferred revenue, or long-term customer deposits out of working capital and into the debt column, your cash at close drops dollar-for-dollar.

To defend your balance sheet, you must prove that these liabilities are a normal part of your operating cycle and are fully offset by historical working capital levels. For accrued PTO, show that your team takes vacation consistently throughout the year, meaning the liability never actually matures into a cash drain. For customer deposits, prove that these represent ongoing operational cash flows used to fund immediate delivery, not long-term liabilities.

Use your EOS® data and your Weekly Meeting scorecard to show the predictable rhythm of your cash inflows and outflows. When you can present highly organized, real-time operating metrics, the buyer’s auditors will have a much harder time claiming your liabilities are unusual or debt-like. Bring these issues to your IDS® sessions early so your finance seat has the GWC™ and the data to shut down these adjustments before they make it into the final QoE report.