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 transitioning from manual operations to automated AI systems, it's common to incur significant non-recurring expenses. Buy-side Quality of Earnings (QoE) teams often attempt to categorize these as ongoing operating costs, which can artificially deflate your adjusted EBITDA. To successfully defend your valuation, you must clearly articulate that these automation costs are extraordinary, one-time investments that warrant normalization as add-backs.

Defending Normalization Adjustments

Under International Valuation Standards (IVS) 105, these expenses represent a structural shift in your business model, rather than routine operating costs. The goal is to prove that these costs are not indicative of your true go-forward profitability.

Here's how to defend these adjustments:

• Categorize costs as extraordinary: Frame your AI automation expenses as extraordinary, one-time investments. These are not typical operational expenditures. This argument is crucial, especially if you're also preparing your financials for a potential sale of your business, where [cleaning financials for business sale valuation](/qa/cleaning-financials-for-business-sale-valuation) is paramount.
• Provide detailed documentation:
• Present a clear, granular breakdown of all costs associated with the AI transition.
• This includes software developer fees, consulting costs, and training expenses.
• For example, if you're implementing an [AI-assisted sales follow-up system](/qa/ai-assisted-sales-follow-up-process), document the specific software licenses, integration services, and training sessions for your sales team.
• Demonstrate that these costs have a defined start and end date, proving they will not recur post-transaction.
• Highlight margin expansion: Crucially, illustrate to the buyer the resulting margin expansion. If these investments led to automated workflows that permanently reduced headcount costs or significantly improved efficiency, you have concrete evidence that the initial expenses were investments in your operational infrastructure. This demonstrates how [AI can optimize the Accountability Chart for EOS organizations undergoing exit planning](/qa/how-can-ai-optimize-the-accountability-chart-for-eos-organizations-undergoing-exit-planning) by enabling more efficient roles.
• Emphasize future profitability: Normalizing these costs protects your historical EBITDA and ensures you receive fair value for the true, go-forward profitability of your automated business. It shows that your business is now more efficient and scalable, making it more attractive to buyers. This aligns with the principle that [buyers pay more for EOS-run businesses](/qa/why-buyers-pay-more-for-eos-run-businesses) due to their documented processes and clarity.