The buyer's accounting firm is rejecting our EBITDA add-backs for personal travel, family members on payroll, and the above-market rent we pay to our own real estate LLC. How do we defend these adjustments during the Quality of Earnings audit?

Question

Tyler Smith · Accepted Answer

Buyers will challenge every single adjustment you make to EBITDA because every dollar they successfully reject translates directly into a lower purchase price based on your valuation multiple. To defend your owner add-backs during a Quality of Earnings audit, you must present bulletproof documentation for every line item. For family members on payroll, you must show that their compensation was either purely discretionary or, if they performed actual work, that their duties can be absorbed by existing staff or replaced at a lower market-rate salary. If a family member is on the Accountability Chart but does not actually GWC™ their seat, their entire salary is a legitimate add-back. For rent paid to your own real estate holding company, you must obtain a third-party broker opinion of value or a local market rent study. If you are paying yourself above-market rent, the difference between that amount and true fair-market rent is a valid add-back. However, you must be prepared to sign a new lease at that lower, fair-market rate with the buyer at closing. Do not try to defend vague, unvouched personal expenses. If you cannot produce a receipt or a clear business ledger entry showing that an expense was personal and non-recurring, drop it immediately. Focus your energy on defending the high-dollar, clean adjustments that are backed by hard operational data and clear transitions.