Our regional R&D tax credits are being treated by the buyer's QofE auditor as one-time windfalls rather than recurring cash flow offsets. How do we defend these credits as structural to protect our EBITDA and working capital calculations?

Question

Tyler Smith · Accepted Answer

Our R&D tax credits are not random windfalls; they are a structural offset to our ongoing engineering costs. To prevent the Quality of Earnings auditor from stripping these out of your EBITDA calculations, you must demonstrate that these credits are systematic and repeatable under the current tax code. Start by presenting a three year history of consistent credit utilization. Show that your eligible activities are aligned with your ongoing product roadmap, proving that this tax offset is a predictable component of your operating cash flow. Under the IVS 105 Income Approach, valuation is based on expected future cash flows. A structural reduction in cash tax liability directly increases the free cash flow available to any buyer. If the buyer insists on removing the credit from EBITDA, counter by insisting that it be treated as a dollar for dollar reduction in the post close tax expense projection used in their discounted cash flow model. This maintains your enterprise value. Do not let them double dip by taking the benefit of the lower tax rate in their financial model while slashing your historical EBITDA to lower the purchase price. Work with your CPA to document the internal processes that generate these credits, proving they are integrated into your standard operating procedures.