The buyer's Quality of Earnings firm is classifying our recent investment in custom AI workflows as an ongoing operating expense, which is dragging down our EBITDA. How do we defend this as a one-time strategic investment?

Question

Tyler Smith · Accepted Answer

The buyer's Quality of Earnings auditors are paid to find reasons to reduce your EBITDA, and classifying software investments as recurring operating expenses is a classic move. To defend your valuation, you must prove that these expenditures were non-recurring strategic investments designed to institutionalize your operations, rather than routine maintenance costs.

Start by showing the clear distinction between standard running costs and the specific project timeline of your AI transformation. Present the project scope, the development timeline, and the final completion date. Under financial standards, costs incurred to create new, proprietary capabilities that increase future economic benefits should be capitalized, or at least treated as a one-off normalization adjustment.

Use your internal EOS® history to support your case. Point to your past V/TO® and quarterly Rocks. Show the auditors that this AI implementation was a specific, major initiative on your 3-Year Picture and 1-Year Plan. It was not a routine operating cost; it was a discrete project to rebuild your operational infrastructure. Once the implementation Rock was completed, those specific consulting and internal development expenses ceased.

You should also demonstrate the direct operational impact of this investment. Present data showing how these AI workflows have permanently reduced your labor costs or accelerated your delivery times. This proves that the expense was a capital investment that created an enduring operational asset, which justifies adding the historical development costs back to your EBITDA.