During buy-side Quality of Earnings diligence, the buyer accounting team is aggressively challenging our owner compensation adjustments and one-time systems conversion costs. How do we defend our normalized EBITDA without getting retraded on our valuation multiple?

Question

Tyler Smith · Accepted Answer

A buy-side Quality of Earnings diligence process is built to systematically trim your reported EBITDA, driving down the purchase price right before definitive legal drafting. When a buyer challenges your historical add-backs, generalized verbal explanations fail. You must defend each adjustment with rigorous operational proof.

To hold your normalized EBITDA against institutional audit scrutiny, follow this protocol:

- Owner compensation adjustments require market salary benchmarking. If you paid yourself 600,000 dollars but argue a replacement executive costs 250,000 dollars, provide third-party executive recruiting data, published compensation surveys, and an updated Accountability Chart. Document how your Seat responsibilities are distributed among the leadership team under your GWC criteria to show that the replacement salary covers real operational needs.
- Segment one-time operational expenses from recurring investments. Buyers love to claim that ERP overhauls, AI workflow integrations, and software buildouts are recurring overhead. Defend these items by producing contract terms, statement-of-work agreements, and clean termination milestones showing that the initiative had a defined scope, clear completion dates, and no future operational run-rate cost.
- Defend non-operating personal expenses with documented bank trails. Vehicle leases, personal travel, and club dues must tie directly to specific general ledger accounts. Every dollar added back must be matched to a verifiable line item so the accounting firm cannot categorize it as baseline corporate overhead.

Retrades during QofE happen when sellers scramble to pull together ad-hoc spreadsheets under tight deadlines. Maintain an audit-ready reconciliation schedule inside your data room. When your adjustments are supported by vendor invoices and market data, you force the buyer to accept the normalized run-rate earnings.