The buyer's Quality of Earnings auditors are refusing to treat our heavy investments in custom AI integrations and database cleanups as add-backs, arguing these are recurring operational costs rather than one-time normalization adjustments. How do we prove these expenses are non-recurring strategic investments to protect our adjusted EBITDA?

Question

Tyler Smith · Accepted Answer

Buyers want to minimize adjusted EBITDA to drive down the purchase price, and their Quality of Earnings team will aggressively classify strategic upgrades as ongoing operating expenses. To defeat this, you must present a clean, documented separation between run-the-business costs and change-the-business investments. Go back to your V/TO® and your quarterly Rocks. Every dollar spent on custom AI integrations and data cleaning should map directly to specific strategic Rocks that have a defined start and end date. Show the auditors the project charters, the third-party developer contracts with fixed scopes, and the internal labor hours allocated to these initiatives. Once a Rock is complete, those costs stop. That is the definition of a non-recurring expense. If you did not hire permanent staff to maintain these systems, you have a watertight case for a normalization adjustment. Present this data in a highly structured impact analysis. Prove that these investments have permanently lowered your future operating costs, meaning the buyer is getting a highly leveraged operational engine. If the auditors still resist, negotiate a post-closing working capital adjustment or use the dispute resolution mechanism in the LOI to bring in an independent third-party CPA to arbitrate.