The buyer's Quality of Earnings firm is attempting to claw back our normalized EBITDA adjustments by classifying our custom AI development costs as ongoing operational expenses rather than one-time capital expenditures. How do we defend these add-backs using our strategic V/TO and operational records?

Question

Tyler Smith · Accepted Answer

During a Quality of Earnings assessment, the buyer's forensic accountants will dissect every transaction to normalize your EBITDA. They will routinely try to classify your internal software and AI development expenses as recurring operating costs rather than capital expenditures, which directly lowers your adjusted EBITDA and your ultimate valuation. To defend these add-backs, you must present a highly documented, audit-ready operational trail. Start by showing your V/TO and your historical Rocks. You must prove that these AI initiatives were finite, strategic investments designed to build a permanent, scalable infrastructure, rather than routine maintenance. Back this up with detailed time-tracking and project scope documents linked directly to your Accountability Chart. Show that the hours spent by your engineering and operations teams were dedicated to building proprietary assets that now operate autonomously, rather than day-to-day client fulfillment. If you can show that these development sprints have concluded and that the resulting AI agents have permanently lowered your cost of goods sold, you can successfully argue that the historical labor costs were non-recurring capital investments. This shifts those expenses out of your operating ledger and back into your adjusted EBITDA calculation, protecting your multiple.