The buyer's Quality of Earnings firm is running a customer-level gross margin analysis and wants to adjust our EBITDA downward because three of our legacy accounts have lower margins than our newer, automated accounts. How do we defend against this margin-blending adjustment without repricing the deal?

Question

Tyler Smith · Accepted Answer

A Quality of Earnings audit is not a standard financial audit: it is a search for reasons to reduce the purchase price. When a buyer tries to blend margins or isolate legacy accounts with lower margins to calculate a downward EBITDA adjustment, they are ignoring the operational reality of your business.

To defeat this, you must show that your legacy accounts require significantly less operational overhead than your newer accounts. In a business run on EOS, your Accountability Chart clearly defines who owns client relationships and operational delivery. Use this chart to prove to the auditors that these three legacy accounts do not require senior leadership time, intensive customer service, or complex onboarding. They are stable, self-running accounts that require minimal sales support or administrative friction.

Furthermore, point out that overall EBITDA is the ultimate measure of the business. You cannot look at individual customer gross margins in a vacuum without looking at the net margin contribution. Show that when you factor in the low customer acquisition cost and high retention rate of these legacy accounts, their net margin is highly profitable. Do not let the buy-side analysts run simple spreadsheets that ignore the actual cost to serve. Bring the conversation back to your consolidated financial performance and the structural efficiency of your leadership team.