During the buy-side Quality of Earnings review, the buyer's accounting firm aggressively disallowed half of our adjusted EBITDA add-backs, claiming they were normal recurring overhead. How do we defend our pro forma adjustments and prevent an immediate multiple-driven valuation cut?

Question

Tyler Smith · Accepted Answer

A buy-side Quality of Earnings report is designed to test your financial stability and find justification for price reductions. When accounting auditors strike your add-backs, they do not just cut dollar-for-dollar EBITDA; they reduce your total valuation by that amount multiplied by your deal multiple. To defend your adjustments, you need evidentiary documentation rather than subjective assertions.

Auditors routinely challenge one-time consulting costs, personal travel, family compensation, and facility upgrades by classifying them as recurring overhead. To withstand their audit, run your add-back schedule like a litigation defense file.

- Provide contemporaneous vendor invoices and contracts demonstrating that professional fees were tied to a completed, non-recurring event, such as a legacy platform migration or lawsuit defense.
- Contrast historical founder compensation against market-rate replacements by pulling actual third-party salary surveys that match the seat defined on your Accountability Chart.
- Tie operational enhancements directly to historical Scorecard metrics, demonstrating that previous capital investments or software implementations permanently shifted run-rate performance.
- Show clean general ledger separation between discretionary shareholder expenses and baseline operating expenses for at least three trailing years.
- Establish an explicit add-back framework in your initial letter of intent that pre-qualifies known adjustments before the buyer's auditors start diligence.

If you allow auditors to classify normal founder expenses as structural overhead, you surrender your deal leverage. Stand firm on verified non-operational items.