The buyers Quality of Earnings firm is attempting to make a negative pro-forma adjustment to our EBITDA because we recently hired a high-salaried Chief Operating Officer, claiming this hire represents a permanent increase in operating costs. How do we argue that this hire actually unlocks massive near-term scalability and should not reduce our historical valuation?

Question

Tyler Smith · Accepted Answer

Quality of Earnings auditors are trained to find any excuse to normalize your earnings downward, and a recent executive hire is an easy target. They will argue that your historical EBITDA must be adjusted downward to reflect the full annualized salary of your new Chief Operating Officer. You must aggressively defend against this negative adjustment. Use your Accountability Chart to frame this hire correctly. Show the auditor that the Chief Operating Officer took over the Integrator seat, which was previously occupied by you as the owner. Prove that by hiring this executive, you have successfully removed yourself from the daily operations of the business, solving the owner dependence problem that typically depresses valuation multiples. This hire actually increases the value of the business by making it a self running asset. Next, demonstrate the immediate operational return on investment this hire has delivered. Pull your weekly EOS Scorecard and show how key performance indicators have improved since the Integrator took the seat. If your utilization rates, project delivery times, or sales conversion rates have increased under their leadership, you have tangible proof of margin expansion. Present your V/TO to show the projected growth that this hire is designed to support. Prove that this executive was hired to handle the next stage of your scaling plan, and that their salary is an investment in future capacity, not just an administrative expense. By showing that the Integrator seat is a revenue and efficiency driver, you can defeat the negative pro forma adjustment.