The buyer's buy-side QofE firm is arguing that our revenue recognition under ASC 606 is too aggressive because we recognize setup fees upfront instead of amortizing them over the customer life. How do we defend our revenue recognition policy to keep them from deferring our current EBITDA into future years?

Question

Tyler Smith · Accepted Answer

During a Quality of Earnings (QofE) assessment, a buyer's analysts will closely examine your revenue recognition policies. If you recognize upfront setup or onboarding fees immediately, they will often argue under ASC 606 that these fees should be amortized over the estimated life of the customer contract. This adjustment deferral reduces your current year EBITDA, directly lowering your purchase price.

To defend your revenue recognition, you must show that your setup fees correspond to distinct, completed performance obligations. You need to prove that the onboarding process delivers immediate, standalone value to the customer, such as custom integrations, software configuration, or training, which are separate from the ongoing service.

Use your EOS® Process Component™ to map out your customer onboarding workflow in detail. Show the analysts the exact deliverables, hours, and resources dedicated to this initial phase to prove it is an independent, upfront project. If your contracts and operational tracking clearly separate these onboarding services from the monthly recurring subscription, you have a strong case to maintain your revenue recognition. By combining tight contract language with documented operational workflows, you prevent the buyer from using technical accounting adjustments to shift your hard-earned EBITDA into the future.