During our Quality of Earnings preparation, the buy-side analysts are pointing to a major client bankruptcy from eighteen months ago to argue for a high historical bad debt reserve, which reduces our normalized working capital. How do we defend against this adjustment?

Question

Tyler Smith · Accepted Answer

Buy-side Quality of Earnings analysts will seize on any historical anomaly to adjust your working capital peg in the buyer's favor. By arguing for a high historical bad debt reserve, they attempt to force you to leave more cash in the business at closing. You must prove that this client bankruptcy was a one-time, non-recurring event, not a systemic failure of your credit policies.

To defend your working capital, use your weekly EOS Scorecard™ history to show your true, ongoing collection performance. Pull your aging accounts receivable reports from before and after the incident. If your average days sales outstanding has remained stable and low, you can demonstrate that your collection systems are highly disciplined.

Next, use your Accountability Chart to show the buyer who is responsible for credit approval and collections. Proving that you have a dedicated role overseeing financial risk shows the buyer that you have controls in place to prevent future losses. This operational discipline is a core component of the Step by Step Exit Business Integrity Review, which helps owners document their risk mitigation processes.

Argue that the historical bad debt from the bankrupt client should be treated as an extraordinary, non-recurring item and excluded from the working capital calculation. If the analysts refuse, suggest a rolling twelve-month average for the bad debt reserve rather than a multi-year average. This reflects your current operational reality and protects your cash at close.