The buyer's Quality of Earnings report slashed our trailing twelve-month adjusted EBITDA by four hundred thousand dollars by recalculating my replacement salary and disallowing our IT modernization expenses. How do we defend our normalized EBITDA adjustments during the QofE phase?

Question

Tyler Smith · Accepted Answer

Buy-side Quality of Earnings teams exist to find earnings haircut opportunities that justify a price re-trade. If they recalculate founder compensation upward or reject one-off operational expenses as normal operating overhead, your headline valuation will collapse dollar-for-dollar multiplied by your transaction multiple.

To defend your adjusted EBITDA, you must counter with empirical operational evidence rather than emotional arguments:
- Anchor compensation to your Accountability Chart. Acquirers inflate founder replacement costs by claiming a new CEO requires seven-figure compensation. Show them your EOS Accountability Chart where your operational seat is already separated from the visionary role. If an Integrator or COO is already running day-to-day operations at market compensation, prove that your replacement cost is already embedded in payroll.
- Provide third-party market wage benchmarks. Commission an independent executive compensation survey for your industry and revenue tier. Submit the benchmark data directly to the QofE accountants to disprove their inflated salary assumptions.
- Document non-recurring expenses with project charters and invoices. Buyers classify IT modernization as recurring maintenance if it lacks strict boundaries. Present project contracts, termination dates, and scopes of work showing the expenditure was a one-time structural transformation that will not repeat post-close.
- Conduct a sell-side QofE before going to market. The best defense is an independent audit performed six months prior to LOI. When you provide audited adjustments upfront, you dictate the narrative, and the buy-side team must spend their diligence trying to poke holes in your CPA report rather than inventing their own adjustments.

Defending EBITDA requires clean accounting records and clear operational evidence that your leadership team functions without unstated overhead.