How is non-recurring income treated in quality of earnings?

How should non-recurring income be treated in a quality of earnings review?

Non-recurring income is normally identified in the quality of earnings (QoE) report, shown as a separate normalization adjustment, and kept out of the run-rate EBITDA that a buyer capitalizes with a multiple. The short version: it is disclosed and explained, but it is not treated as repeatable earnings.

A data-licensing payment is a clean example. A company that licenses years of operational records for an agreed term receives a one-time payment, which a QoE provider would commonly present as a distinct line rather than blend into the operating base. Confirm the exact presentation with the QoE provider and the company's accountants, because it turns on the contract terms.

What does a QoE provider actually do with one-time items?

The provider starts from reported EBITDA and bridges to adjusted EBITDA, line by line. Each adjustment gets a label, a support reference and a direction.

The direction of an adjustment is the part sellers misread. A one-time gain is a negative adjustment to run-rate EBITDA: it comes out, even though it increased reported profit that year.

The three-question test for a one-time receipt

Advisors can screen any unusual receipt with three questions before the QoE work starts.

1. Is there a contract that repeats it? Annual renewals or minimum commitments point toward recurring. A single agreed payment does not.
2. Does it depend on a decision the company will not repeat? Licensing a historical archive once is a decision, not a service line.
3. Can it be tied to the core operating cost base? If delivering it required no new staff or product, buyers tend to see a windfall, not a business line.

If all three come back "no", expect the item to be isolated and excluded from the multiple.

How does a data-licensing payment fit this treatment?

SourceX describes the payment as a one-time amount, typically received within about 60 days of invoicing once the buyer selects the data, for a license that is usually exclusive for AI training over an agreed term. The company keeps ownership; data is licensed, not sold. That structure is why advisors should plan for separate presentation.

Two practical consequences follow for a sell-side process:

• The payment can improve cash and the equity story without lifting the multiple-based valuation, so do not pitch it as a reason for a higher multiple.
• The exclusive term and any redaction commitments belong in the diligence data room, because a buyer will ask what the company can still do with its records.

Where the line sits on the income statement is a separate question, covered in other income vs operating revenue. Revenue-recognition rules for licenses depend on the contract: FASB's 2016 clarifications to Topic 606 addressed the difference between a right to use and a right to access intellectual property. This is general information, not legal, tax or financial advice. Confirm with your own counsel, tax adviser or professional body before acting.

Illustrative: a license payment inside a sale process

Illustrative and fictional: a regional IT services firm is six months from going to market. Its CFO learns that a one-time records license is possible. The sell-side advisor does three things: records the payment as a separate disclosed item in the QoE bridge, leaves it out of the run-rate figure used for the valuation range, and adds the license agreement to the data room index. The buyer's diligence team sees a clearly labeled non-recurring item instead of discovering it late.

Common mistakes with one-time income in a sale

What this means for an M&A advisor and referral partner

Advisors who raise records licensing early can bring clients a cleaner answer than a surprise in diligence. The exit readiness assessment is a natural place to ask which records exist and who can authorize a license, and a success fee arrangement with a client is a separate matter from any partner reward.

Partners earn 25% of the eligible platform fees SourceX actually collects from the referred company's licensing deals, capped at $100,000 per referred company. The reward becomes payable only after the buyer pays and SourceX receives its fee, and no reward is guaranteed. It is never deducted from what the company receives. Check your own firm and regulator rules on referral fees and disclosure first.

If you are screening a client, the company fit checker gives a preliminary, non-binding read, and who qualifies lists the baseline. Related reading for advisors is on the M&A advisor referral page.

Next step

Pick one client with a sale or financing event ahead and ask whether anyone has reviewed its records for licensing. If it fits, register as a partner and make the introduction, or have the owner apply at sourcex.si/apply.