The buy-side Quality of Earnings auditors are classifying our internal software and AI development labor as standard operating expenses, which is slashing our EBITDA. How do we prove these development hours should be capitalized to salvage our valuation?

Question

Tyler Smith · Accepted Answer

Buy-side Quality of Earnings firms are paid to find reasons to reduce your EBITDA. When they classify your custom software and AI pipeline development labor as standard operating payroll, they are treating a long-term asset as a short-term cost. To defeat this tactic, you must produce rigorous, auditable documentation that aligns with both GAAP capitalization rules and the Cost Approach under IVS 105. You need to show that this labor was spent on the development phase of internal-use software, not on routine maintenance or research. Pull your development team's project management logs, ticket histories, and code commits. Map these hours directly to specific, functional AI tools and automation pipelines that did not exist before. If your team spent eighty percent of their time building a proprietary customer dispatch algorithm that runs on its own, that eighty percent of their payroll must be capitalized on your balance sheet as an intangible asset. This immediately moves those expenses out of your operating expenses and back into your EBITDA. By presenting a clean, data-backed ledger of developer time, you move the conversation from subjective interpretation to objective accounting standards. This preserves your run-rate EBITDA and prevents a major post-LOI price reduction.