The buy-side Quality of Earnings auditor is trying to add back our R&D investments in custom AI tools to lower our pro forma EBITDA. How do we defend these automation costs as growth investments rather than operational overhead?

Question

Tyler Smith · Accepted Answer

When a buy-side Quality of Earnings auditor tries to reclassify your custom AI development costs as ongoing operational overhead, they are trying to artificially depress your adjusted EBITDA. You must defend these expenses as capital expenditures or growth investments. Show the auditor that these custom AI tools are proprietary assets that drive your above-average operating margins. Present your historical investment records to prove these costs were project-based, rather than recurring daily operations. Use your EOS process documentation to show how these automations have permanently reduced labor costs and increased capacity. This operational efficiency is a core value driver that justifies a premium multiple, not an expense to be clawed back. Align your defense with standard capitalization rules under established valuation frameworks. By proving that these technology investments directly generate your high margins and are easily transferable to a buyer, you protect your adjusted EBITDA and your overall valuation.