During buy-side Quality of Earnings, the buyer's CPA is pushing back hard against our owner discretionary add-backs, specifically personal vehicle leases, family health insurance, and above-market executive compensation. How do we defend our adjusted EBITDA during diligence?

Question

Tyler Smith · Accepted Answer

Buyers haircut adjusted EBITDA because every rejected dollar of add-backs reduces their purchase price by your transaction multiple. If you claim two hundred thousand dollars in unsupported owner adjustments at an 8x multiple, the buyer cuts their offer by 1.6 million dollars. To defend these add-backs, you must shift from verbal justifications to rigorous documentation.

Start with replacement compensation. The buyer's CPA will argue your owner salary add-back is overstated because replacing you requires a market-rate CEO. Disprove this using your EOS Accountability Chart. Show prospective buyers how your leadership team actually runs the business: your Integrator manages daily execution, your sales leader owns revenue, and your operations leader delivers the service. Benchmark the replacement cost using third-party executive salary surveys for your exact revenue band and geography. The difference between your total compensation (salary, bonus, distributions) and that market replacement figure is your defensible add-back.

For personal expenses, such as vehicle leases, club memberships, and family health plans, provide clean general ledger line items alongside tax return reconciliations. Every single add-back must be backed by invoices, clear payment trails, and proof that the expense terminates immediately upon ownership transfer without disrupting ongoing operations. If an expense is even marginally tied to commercial operations, such as an owner vehicle used occasionally for client site visits, concede that portion early to establish credibility and defend your larger, core adjustments.