The buy-side Quality of Earnings team is rejecting our EBITDA add-backs for historical founder-related marketing expenses, claiming they are core operating costs. How do we defend these normalized earnings to protect our enterprise value?

Question

Tyler Smith · Accepted Answer

During a Quality of Earnings audit, the buy-side firm will scrutinize every adjustment you make to your historical EBITDA. They often target founder-related expenses, claiming they are necessary operational costs rather than discretionary items that can be added back to earnings. To defend these add-backs and protect your enterprise value, you must provide clear documentation and operational evidence.

Start by categorizing your add-backs into distinct, verifiable buckets. For personal expenses or owner-related benefits, provide invoices, tax returns, and general ledger details that prove these costs will not continue after the transaction.

For owner compensation adjustments, use your Accountability Chart to show the buyer exactly which seat the owner occupies and the market rate for that role. If the owner is paid a premium salary but their seat can be filled by a professional manager at a lower market rate, the difference is a valid EBITDA add-back. Use standard industry compensation surveys to justify your market-rate calculations.

If the buy-side team claims that marketing or R&D expenses incurred by the founder are core operational costs, prove that these were one-time, discretionary growth investments. Show them the specific project timelines, completed deliverables, and the subsequent return on investment. By presenting a clean, well-documented trail of evidence, you make it incredibly difficult for the buyer's auditors to reject your adjustments and chip away at your valuation.