We signed two massive enterprise contracts six months ago that increased our annualized run-rate by forty percent, but the buyer's Quality of Earnings report insists on valuing us strictly on historic trailing twelve-month reported cash flows. How do we substantiate pro-forma run-rate EBITDA adjustments in diligence to get paid for recent growth?

Question

Tyler Smith · Accepted Answer

Buyers prefer historic trailing twelve-month (TTM) numbers because audited bank deposits eliminate guesswork. However, if your company signed significant multi-year enterprise contracts midway through the year, a backward-looking TTM calculation understates your current operational earnings power. Valuing your business on past twelve-month performance forces you to give away post-closing revenue that your team has already secured and implemented.

To successfully defend pro-forma run-rate adjustments in a Quality of Earnings audit, you must present an airtight proof-of-run-rate framework rather than speculative sales forecasts. Buyers and their forensic accountants will reject adjustments based on verbal commitments, pipeline opportunities, or contracts that have not yet gone live. They will, however, accept annualized run-rate credit if you establish three operational criteria:
- Fully Onboarded Delivery. Show that the customers are live, active, and fully integrated into your operations, with at least two or three months of clean, recurring billing and collection history.
- Clean Gross Margin Demonstration. Calculate the specific gross margin generated by these accounts during their live billing cycle. Do not assume your company-average margin; prove the actual direct labor, material, and delivery costs tied to these clients.
- Fully Loaded Capacity Overhead. Detail any incremental overhead, software licenses, or administrative labor required to service the new contract volume on your Accountability Chart. Buyers will deduct these operating expenses from your annualized gross margin.

Treat the preparation of this data as a critical finance Rock ahead of diligence. When you deliver an institutional-grade run-rate bridge that connects signed contracts, verified bank deposits, and matching delivery capacity, you give the buyer and their lenders the mathematical justification required to price your business on forward run-rate EBITDA.