The buy-side Quality of Earnings analyst wants to cut our adjusted EBITDA because of customer churn in a discontinued service line we eliminated last year. How do we separate legacy operational data to defend our run-rate earnings baseline?

Question

Tyler Smith · Accepted Answer

Buy-side Quality of Earnings analysts will relentlessly attempt to drag old operational baggage into your current run-rate EBITDA. When you shut down a legacy service line, buyers often highlight the historic revenue loss as evidence of client instability while quietly keeping the overhead costs of that discontinued line embedded in your historical operating expense base. This creates an artificially suppressed EBITDA figure that chips away at your valuation.

To counter this adjustment, you must execute a surgical pro forma carve-out. Isolate every dollar of revenue, direct material cost, and direct labor associated with the eliminated service line across your historical thirty-six-month profit and loss statement. You must prove that the customer attrition was an intentional strategic operational decision rather than organic client rejection. Show the buyer how the resources freed from that discontinued product were redeployed into your higher-margin core focus as outlined in your V/TO.

Ground your defense in verifiable data. Provide a detailed bridge schedule showing that gross margins and net margins expanded following the termination of that line. In our Step by Step Exit framework, we prepare this operational evidence ahead of diligence so the sell-side narrative leads the conversation. When the buy-side team attempts to dock your trailing twelve-month performance for churn in an abandoned offering, present the clean carve-out documentation showing zero ongoing resource drain, zero recurring delivery risk, and a higher quality, more durable revenue mix.