The 3 Pillars of Transaction Services — And Why They Are One System, Not Three Workstreams

Early in their careers, many junior professionals approach these topics as siloed analyses: one team on QoE, another on WC, another on Net Debt. That mindset is understandable—but it is also incomplete.

True mastery of deal advisory lies in understanding that these pillars form an interconnected financial ecosystem. A judgment call in one area almost always propagates into the others, with a direct and often material impact on equity value, purchase price mechanisms, and ultimately deal negotiations.

1. Quality of Earnings: Finding the North Star

The objective of a Quality of Earnings analysis is deceptively simple: remove accounting noise to arrive at an Adjusted EBITDA that reflects the sustainable, recurring profitability of the business.

In practice, this is where judgment matters most.

There is no authoritative or universal definition of Adjusted EBITDA. It is not an accounting standard; it is a construct, shaped by commercial reality and negotiated implicitly (or explicitly) with Management and, later, with Buyers.

When I review a P&L, I am not just reconciling numbers—I am interrogating the economic story behind them. The core categories of adjustments typically fall into three buckets:

Non-Recurring / One-Off Items

These are the classic “salt and pepper” expenses that inflate or depress profitability in a way that will not persist post-closing:

• Transaction and advisory fees

• Litigation settlements

• One-time restructuring or severance costs

The key question is not whether they occurred—but whether they are structurally repeatable.

Accounting and Classification Adjustments

These adjustments ensure comparability and valuation relevance rather than cash accuracy. Typical examples include neutralization of IFRS 16 lease effects to restore a pre-lease-capitalization EBITDA

Here, the objective is consistency with market practice, not theoretical purity.

Standalone and Carve-Out Adjustments

In carve-out situations, reported EBITDA often benefits from implicit subsidies from a parent group. The analyst must estimate replacement costs for services such as:

• Finance, HR, IT

• Legal and compliance

• Centralized procurement or insurance

This is where QoE becomes forward-looking: we are not restating the past—we are approximating a credible future operating model.

2. Working Capital: The Operational Pulse of the Business

If QoE explains how much profit the business generates, Working Capital explains how much cash it consumes—or releases—just to operate.

This distinction is critical.

In certain business models, particularly SaaS and subscription-based companies, I often encounter structurally negative working capital. Annual upfront billing (deferred revenue) combined with monthly cost outflows creates a situation where:

• EBITDA understates cash generation

• Working capital becomes a source of liquidity rather than a use

Understanding this dynamic is essential when interpreting cash conversion.

Normalization: The Core of WC Analysis

Deals do not close on “average” days. They close on arbitrary dates—often when working capital is abnormally high or low due to:

• Seasonality

• Large customer billings

• Inventory builds or destocking

To neutralize this noise, I typically compute a Last Twelve Months (LTM) average working capital, which serves as the reference point for the purchase price adjustment.

Common normalization adjustments include:

• Removing debt-like items hidden in working capital (e.g. income tax payables, declared dividends)

• Correcting cut-off errors in revenue recognition or inventory capitalization

At this stage, WC stops being mechanical and becomes analytical.

3. Net Debt: Uncovering What the Balance Sheet Hides

Net Debt is often misunderstood as a simple formula: cash minus bank loans. In Transaction Services, that definition is dangerously incomplete.

We work with Adjusted Net Debt, designed to reflect all obligations that reduce equity value in a cash-free, debt-free transaction.

When reviewing a balance sheet, I actively look for liabilities that behave economically like debt, even if they are not labeled as such:

• Earn-outs and put options tied to prior acquisitions

• Provisions for litigations, tax exposures, or environmental obligations

• Unfunded pension liabilities, which are financial debt in disguise

• Accrued dividends declared but not yet paid to shareholders

These items matter because they represent future cash outflows that the Buyer will inherit unless explicitly adjusted for.

4. Integration: Where Deals Are Won or Lost

The most advanced—and most misunderstood—aspect of Transaction Services lies in how these analyses interact.

Working Capital Seasonality as a Debt-Like Adjustment

If actual closing working capital is below its normalized level, it often means the Seller has extracted cash ahead of closing. In such cases, I will typically argue for a debt-like adjustment to protect the Buyer.

This is where Working Capital and Net Debt converge.

P&L Adjustments Have Balance Sheet Mirrors

Every QoE adjustment should trigger a balance sheet reflex.

Example:

If I add back a non-recurring consulting fee in EBITDA, I must verify whether:

• The related invoice remains unpaid in accounts payable

If it does, leaving it in Working Capital would inflate “normal WC.” The correct treatment is to reclassify it to Net Debt, ensuring that:

• EBITDA is normalized

• Working capital remains economically clean

• No double counting occurs

This discipline is what separates robust diligence from cosmetic analysis.

A Simple Analogy to Tie It All Together

Think of the business as a fruit tree.

• Quality of Earnings is the yield: pruning dead branches and abnormal growth to assess how much fruit the tree can reliably produce each year.

• Working Capital is the sap: the liquidity circulating through the system that keeps the tree alive day-to-day. Too little sap, and future yields collapse.

• Net Debt is the mortgage on the orchard: every claim—banks, pensions, litigations—that must be settled before ownership is truly yours.

You cannot value the orchard by looking at the fruit alone.

You must know whether the sap is flowing—and whether the bank is about to reclaim the land.