We implemented a major price increase and signed three enterprise contracts midway through our trailing twelve months, which boosts our forward annualized run-rate by one million dollars. How do we validate these pro-forma run-rate adjustments in a Quality of Earnings report so the buyer applies their multiple to future earnings rather than historical cash?

Question

Tyler Smith · Accepted Answer

Buyers will always attempt to price your business strictly on historical trailing twelve month (TTM) cash flows because it lets them capture your recent growth for free. If you executed material price increases or signed major contracts mid-year, historical TTM earnings understate your true earning capacity. To force an institutional buyer to apply their multiple to your forward run-rate EBITDA, you must validate those adjustments inside a formal Quality of Earnings framework.

Validating pro-forma run-rate adjustments requires meeting three non-negotiable tests:

- Contract Finality: Pipeline forecasts, verbal commitments, and letters of intent carry zero weight with buy-side transaction advisors. The enterprise contracts must be fully executed, with explicit start dates, binding pricing terms, and no unilateral termination-for-convenience clauses during the initial term.

- Net Margin Realism: You cannot simply annualize gross revenue and add the top-line amount to EBITDA. You must calculate the fully burdened net contribution margin. This requires deducting direct cost of goods sold, payment processing fees, and the specific operational capacity (such as customer service headcount or software user licenses) needed to fulfill the contracts.

- Demonstrated Pricing Persistence: For price increases, buyers will look for customer pushback or churn. You must demonstrate at least two to three billing cycles on your EOS Scorecard showing zero volume loss, healthy collection cycles, and customer payments flowing through cash accounts under the new rate structure.

Presenting these adjustments with granular, contract-level detail converts speculative future growth into an empirical, audit-grade pro-forma adjustment, compelling buyers to pay full multiple value for current run-rate performance.