The buyer's Quality of Earnings firm is attempting to normalize our owner compensation using an inflated market rate that ignores the fact that we have already hired a full-time Integrator. How do we defend our Adjusted EBITDA against this adjustment?

Question

Tyler Smith · Accepted Answer

The buy-side Quality of Earnings firm will always look for ways to adjust your earnings downward to justify a lower purchase price. A common tactic is replacing the historical owner salary with an inflated market rate, arguing that replacing you will cost more. However, if you have already implemented EOS® and have a high-performing Integrator running the day-to-day operations, this adjustment is logically flawed.

To defeat this adjustment, you must present your Accountability Chart to prove that your seat has already been replaced operationally. Show the buyer that your compensation is a pure shareholder distribution rather than an active executive cost. You must clearly demonstrate that the Integrator is the one driving the weekly Level 10 Meeting™ and executing the V/TO®.

Under the Income Approach of IVS 105, valuation is based on the future economic benefits flowing to the owner. By proving that the operational leadership cost is already fully loaded into your financial statements via your Integrator's market-rate salary, you can force the auditor to back down. Offer the buyer documented proof of your minimal involvement in daily activities. Show them your scorecard history where the Integrator signs off on weekly targets. This evidence demonstrates that your current salary is a discretionary distribution that should be added back to EBITDA rather than replaced with a hypothetical corporate executive cost.