The buy-side Quality of Earnings firm is trying to retroactively classify our software-as-a-service subscriptions as consulting revenue because we do some upfront custom configuration. How do we defend our software multiple during their financial audit?

Question

Tyler Smith · Accepted Answer

This is a classic buy-side tactic designed to chip away at your enterprise value by shifting high-multiple recurring software revenue into a low-multiple professional services bucket. To defeat this adjustment, you must show a clear line of demarcation in your customer agreements and your general ledger. Under valuation standards like IVS 105, you need to prove that the upfront configuration is a non-recurring setup cost and not the core value driver.

First, show that your software operates independently of the custom configuration. If a customer can use the platform without ongoing consulting, the software revenue is structurally distinct. Provide the QofE auditors with historical data showing that your subscription renewals are decoupled from any additional consulting work.

Second, pull your resource utilization data. If your customer success team is not spending continuous manual hours maintaining the client after setup, the gross margin on those subscriptions is pure software.

Third, use your EOS® framework to show who runs this. Point to your Accountability Chart to show that your customer onboarding seat is separate from your ongoing software engineering seat. This proves your operations are built for scalable product delivery, not manual services. By showing that your professional services are simply an enablement tool for a highly profitable, self-sustaining software platform, you can force the buyer to value your subscription cash flows at a premium SaaS multiple.