The buyer's buy-side Quality of Earnings team is proposing significant downward pro forma adjustments for key employee compensation and deferred facility maintenance that we never accounted for in our internal numbers. How do we defend our adjusted EBITDA calculation during QofE without blowing up the deal?

Question

Tyler Smith · Accepted Answer

When a buy-side Quality of Earnings team issues their initial report, their primary mandate is finding adjustments that reduce adjusted EBITDA and lower the cash purchase price. Downward adjustments for owner compensation, below-market officer wages, deferred maintenance, and software capitalization are standard playbook items. To defend your numbers, you must counter with documented evidence, operational consistency, and clear add-backs.

Start by separating true run-rate operating expenses from one-off expenditures. If the buyer claims you underpaid key leaders, show your current compensation bands and retention metrics. If your leaders are compensated fairly based on your regional market and demonstrated by low turnover, prove that these seats on your Accountability Chart are already filled by individuals who GWC their roles at sustainable market salaries.

For maintenance and capital expenditures, pull historical work orders and run-rate vendor contracts. A buyer will try to characterize routine operational maintenance as delayed capital expenditure to penalize current earnings. If your facility runs predictably and Scorecard metrics demonstrate zero unplanned downtime, their assertion fails.

Demand a formal EBITDA reconciliation bridge. Meet with their accounting analysts alongside your transaction CPA to examine every proposed haircut item by item. When you run regular quarterly financial reviews, you already have the documented baseline for why expenses were incurred. Concede legitimate accounting adjustments early, such as true accrual adjustments, so you preserve maximum credibility to defeat speculative reductions. Standing firm on defensible run-rate operational reality stops the haircut before it becomes a revised purchase price.