In our preliminary QoE meetings, the buy-side advisor is pushing to reclassify our year-end performance bonuses and accrued PTO liabilities out of working capital and into trailing twelve months operating expenses. Why are they doing this, and how do we defend our EBITDA?

Question

Tyler Smith · Accepted Answer

This accounting maneuver is one of the most aggressive ways buyers quietly re-trade a transaction during confirmatory diligence. Understanding the mathematical difference between working capital and adjusted EBITDA explains their motivation.

If accrued bonuses or paid time off liabilities remain inside net working capital, every dollar of adjustment results in a simple one-to-one dollar reduction on the closing settlement statement. But if the buyer's Quality of Earnings advisor convinces your deal team that those bonuses are unrecorded recurring operating expenses that belong above the line in your trailing twelve months P&L, that expense reduces your baseline EBITDA. At a seven-times multiple, moving a two hundred thousand dollar bonus liability into recurring operating expense vaporizes 1.4 million dollars in enterprise value.

To shut down this EBITDA reduction during diligence:

- Demonstrate historical consistency: Prove through past financial statements that performance bonuses and vacation accruals have always been handled as periodic balance sheet accruals rather than omitted operating expenses.
- Tie bonuses to owner discretion: If the bonuses were tied to founder discretion or transaction milestones rather than contractual, nondiscretionary employee compensation agreements, document them as non-recurring pro forma add-backs.
- Anchor to your operating cadence: Show how your quarterly performance targets and Rocks establish clear compensation timing that belongs squarely within standard annual working capital cycles.

Push your transaction CPA to lock down bonus and PTO classifications during initial sell-side prep so the buyer cannot weaponize routine balance sheet accruals against your EBITDA.