The buyer's Quality of Earnings firm is disputing our normalization adjustments for our transition from manual operations to automated AI systems. How do we defend these run-rate adjustments to prove our true go-forward profitability?

Question

Tyler Smith · Accepted Answer

When you transition your operations from manual labor to automated AI systems, you incur significant non-recurring expenses. The buy-side Quality of Earnings team will often try to treat these as ongoing operating costs to lower your adjusted EBITDA.

To defend your valuation, you must argue that these automation costs are extraordinary, one-time investments that should be normalized as add-backs. Under IVS 105, these expenses represent a structural shift in your business model, not routine operating costs.

Present a clear, documented breakdown of all costs associated with the AI transition. This includes software developer fees, consulting costs, and training expenses. Prove to the auditor that these costs have a clear start and end date, and that they will not recur post-transaction.

Crucially, show the buyer the resulting margin expansion. If you spent money to build automated workflows that permanently reduced your headcount costs, you have proven that those initial expenses were investments in your operational infrastructure. Normalizing these costs protects your historical EBITDA and ensures you get paid for the true, go-forward profitability of your automated business.