Buyers and their Quality of Earnings auditors will closely scrutinize how we account for our software development costs. If we have been capitalizing these expenses, how do we defend our adjusted EBITDA during diligence?

Question

Tyler Smith · Accepted Answer

Buyers and their Quality of Earnings auditors will closely scrutinize how you account for your software development costs. If you have been capitalizing these expenses to make your EBITDA look higher, they will attempt to reclassify them as operating expenses, which directly reduces your valuation multiple.

You must defend your accounting treatment by showing a clear link between your development work and new revenue generation. Use your EOS V/TO and Rocks history to prove which software projects were strategic, long-term assets rather than routine maintenance.

Routine bug fixes and minor updates must be expensed, but major new features that expand your market capability can be legitimately capitalized. Document the exact hours your engineering team spent on these capital projects.

Show the auditor the specific project management logs and link them to your product roadmap. When you present a clean, audit-ready breakdown of development hours backed by historical operational data, you prevent the buyer from writing down your adjusted EBITDA.

This disciplined documentation preserves your trailing twelve-month earnings and ensures you secure the premium platform multiple you deserve.