The buy side Quality of Earnings team is challenging our percentage of completion revenue recognition method on long term projects, trying to shift EBITDA to future periods. How do we defend our historical revenue matching and preserve our trailing twelve months EBITDA?

Question

Tyler Smith · Accepted Answer

Buy side Quality of Earnings firms love to attack percentage of completion accounting because shifting revenue forward is an easy way to artificially lower your historical EBITDA and drop your purchase price. To defend your numbers, you must present a tight, data driven reconciliation of your project delivery milestones. Pull your historic project files and match every dollar of recognized revenue to specific, verifiable operational deliverables.

Show the buy side team that your percentage of completion matches the actual labor hours, material costs, and engineering sign offs completed in each period. This is where your operational discipline pays off. If you are running EOS, you should have historical data from your weekly metrics to back this up. Prove that your historical margins on completed projects have remained consistent over the last three years. If your actual margins consistently match your estimated margins at completion, the buyer has no basis to claim your revenue recognition is aggressive.

You should also demand that the net working capital peg reflect this revenue matching. If the buyer insists on deferring revenue to post close periods, they must also assume the corresponding project liabilities and deferred costs on the balance sheet, which increases your cash proceeds at close. Do not let them cherry pick the revenue without the offsetting liabilities. Stand firm on your matching principles.