We plan to normalize our EBITDA with several owner add-backs like personal vehicles, travel, and below-market family salaries. How will a buy-side Quality of Earnings audit scrutinize these adjustments, and how do we defend them?

Question

Tyler Smith · Accepted Answer

During an acquisition, a buy-side Quality of Earnings audit exists to dismantle your earnings before interest, taxes, depreciation, and amortization. Acquirers hire forensic accountants to challenge every single adjustment you claim, because every dollar they strip away reduces your enterprise value by five to eight dollars.

Legitimate add-backs reflect true non-recurring, unusual, or discretionary expenses that an incoming owner will not incur. If you plan to normalize earnings, you must build an airtight defense two to three years before going to market:

- Owner compensation adjustments: If you pay yourself two hundred thousand dollars but replacing your operational seat requires a three hundred thousand dollar executive, that is a negative add-back. You must benchmark market-rate compensation for every owner-occupied seat on your Accountability Chart.
- Discretionary perks: Personal vehicle leases, family travel, country club memberships, and personal legal fees are common targets. While defensible, sloppy documentation destroys credibility. If you claim an expense is non-business, prove the personal nature and demonstrate that removing it will not harm operations.
- Run-rate and pro-forma adjustments: Buyers reject speculative adjustments such as projected savings from new software or anticipated head-count reductions that have not actually occurred. Every operational saving must be verified in your actual general ledger for several months before marketing the business.
- One-time professional fees: Litigation defense costs, specialized consulting, or facility move expenses are valid add-backs, but you must provide invoices, engagement letters, and proof that the issue is fully resolved.

Stop waiting for due diligence to justify your adjustments. Work with an exit-focused accounting professional to audit your trailing twelve-month expenses every quarter. When every add-back includes an invoice and a clear business rationale, buyers accept your EBITDA without clawbacks.