During our buy-side Quality of Earnings audit, the buyer's forensic accountants are trying to classify our long-standing annual employee bonus pool as a debt-like item rather than an operational working capital adjustment. How do we present our historical compensation policies and operational records to keep this out of the debt column?

Question

Tyler Smith · Accepted Answer

Buy side Quality of Earnings firms are paid to find reasons to chip away at your valuation. If you pay annual bonuses to your team, the auditors will try to classify these as debt like items or historical liabilities that you must pay off at close, rather than standard operational expenses covered by your working capital peg. This move can cost you hundreds of thousands of dollars in cash at closing. To defeat this attempt, you must prove that these bonuses are a normal, recurring part of your compensation model. Show the auditors that the bonus pool is calculated as a fixed percentage of operating profit and is distributed consistently every year. Present your documented Rocks and historical operational metrics to show how employee performance directly drives this pool. When you demonstrate that your leadership team has a clear understanding of this system and that the payments are tied to the current operating cycle, it supports your argument that the bonuses belong in the net working capital calculation. They are an ongoing operating expense, not a hidden liability. Make sure your historical accounting records match this narrative. If you have consistently accrued for these bonuses on your balance sheet month by month, the buy side firm will have a difficult time arguing they are extraordinary debt like items. This level of preparation protects your EBITDA run rate and ensures you keep your cash when the deal finally closes.