We recently hired an expensive Chief Operating Officer to replace the owner's operational role, which depressed our trailing twelve-month EBITDA just before going to market. How do we justify a pro-forma adjustment to the buy-side Quality of Earnings team so we are not penalized on our valuation for doing the right thing to institutionalize our leadership team?

Question

Tyler Smith · Accepted Answer

Hiring a professional Chief Operating Officer to replace yourself is the correct strategic move to prepare your business for an exit, but the short-term financial impact can look like an EBITDA penalty. To prevent a buy-side Quality of Earnings team from discounting your valuation, you must present this hire as a normal owner-replacement adjustment.

Start by documenting your historical role and the transition of responsibilities. Use your EOS Accountability Chart to show that you, the owner, previously occupied both the Visionary and Integrator seats. Explain that the new COO has stepped into the Integrator seat to run daily operations, allowing you to step back.

When presenting your adjusted EBITDA, argue that the COO's salary should be treated as a replacement for your owner compensation, not as an additive corporate expense. If you were drawing a market-rate salary plus distributions, the new COO's compensation simply replaces your personal compensation on a one-for-one basis.

By proving that the new hire is a substitution rather than an expansion of overhead, you can neutralize the EBITDA drag. More importantly, emphasize to the buyer that this hire actually de-risks the transition by proving the business runs smoothly without you. This turns a potential financial penalty into a powerful proof point of operational maturity.