During the buy-side Quality of Earnings, the buyer's CPA firm is challenging our revenue run rate because of contract renewals and project-based work. How do we defend our revenue quality and keep them from taking an EBITDA haircut?

Question

Tyler Smith · Accepted Answer

A buy-side Quality of Earnings team looks for volatility and margin degradation to justify an EBITDA haircut. When they see non-standard contract renewal dates or heavy project revenue, they immediately attempt to reclassify that cash as lumpy, non-recurring income.

To defend your numbers, you must reframe project-based revenue around historical customer lifetime value and recurring annual spend. Prepare cohort analysis covering thirty-six months. Group clients by acquisition year and display their total spend per annum. If a client hires you for projects year after year without a formal master service agreement retainer, their capital is operationally recurring even if contractually transactional. Buyers value predictability above paperwork.

Next, use your operational Scorecard to demonstrate consistent customer retention and pipeline conversion. Show gross revenue retention alongside net revenue retention. If net retention sits above 100 percent, you prove that expanding spend from existing accounts offsets project turnover.

Do not let their accountants dictate the definitions of recurring revenue in isolation. When you identify the issue during diligence, use an IDS session with your transaction team to isolate every contested account. Present signed Statements of Work for the upcoming two quarters paired with delivery milestones tracked by your department heads.

If the buyer attempts an EBITDA reduction on project margins, tie your response to your capacity utilization metrics. Show that your labor cost scales dynamically with project demands, maintaining a consistent gross margin percentage across rolling twelve-month cycles.