We have spent years writing off all our custom software and AI pipeline development as immediate operating expenses to lower our tax bill, but now our EBITDA looks artificially depressed. How do we retroactively clean up our software capitalization policies during our exit runway to maximize our valuation?

Question

Tyler Smith · Accepted Answer

When you write off custom software and artificial intelligence development as immediate operating expenses, you minimize your tax liability but severely damage your enterprise value. Buyers pay a multiple of EBITDA. Every dollar of development cost that remains buried in your operating expenses represents several dollars of lost enterprise value at sale. To fix this on your exit runway, you must establish a clear capitalization policy. Start by separating your research phase costs from your development phase costs. Research phase activities, like brainstorming and testing basic feasibility, must still be expensed. Development phase activities, which include the actual coding of your proprietary software and training machine learning models, can be capitalized as intangible assets on your balance sheet. Work with a qualified CPA to audit your historical payroll and contractor costs for the past three years. You need to isolate the exact hours your engineering team spent building these scalable systems. Reclassify those developer hours as capitalized software development. By moving these investments out of your operating expenses, you immediately increase your net income and present a much truer picture of your operational profitability. This shows buyers that you have built a durable, proprietary asset rather than a series of ongoing, high-cost maintenance projects. Do not wait until due diligence to make this correction. Doing it now gives you a clean historical record that buyers can easily verify.