We are preparing for a sell-side Quality of Earnings assessment, but we are unsure how to defend our owner-related add-backs and one-time software implementation costs. How do we document these operational adjustments to ensure they are accepted by the buyer's analysts?

Question

Tyler Smith · Accepted Answer

A buy-side Quality of Earnings analyst will scrutinize every adjustment you claim, looking for any excuse to claw back your adjusted EBITDA and lower your purchase price. If you cannot defend your add-backs with clear, empirical data, they will chip away at your valuation. We recommend preparing for this by running a sell-side Quality of Earnings assessment several months before going to market. This proactive step allows you to identify and document every valid adjustment under the guidance of your own specialized accounting firm. You must keep meticulous records of all owner-related personal expenses, above-market compensation, one-time legal fees, and non-recurring software development costs. In your weekly Level 10 Meetings, task your financial seat with maintaining an audit-ready file for every proposed add-back. Do not rely on memory or vague descriptions. You need invoices, employment contracts, and project scopes that prove these expenses are truly non-recurring or personal to you. When you present a buyer with a well-documented sell-side report and immediate access to supporting ledgers, you neutralize their ability to challenge your numbers and protect your negotiated valuation.