The buy-side Quality of Earnings team is refusing to normalize our high executive salaries as EBITDA add-backs, claiming these key roles cannot be replaced at lower market rates. How do we defend these adjustments?

Question

Tyler Smith · Accepted Answer

Buyers often challenge owner and executive compensation add-backs during due diligence to reduce your normalized EBITDA and lower their purchase price. They will argue that the high salaries are necessary to keep the business running and that a replacement manager would cost just as much.

To defend these adjustments, you must decouple the individuals from the seats on your Accountability Chart. Present the buyer with clear, documented job descriptions for each executive role, along with third-party salary surveys for comparable positions in your industry and region.

If your current executive is earning significantly more than the market rate, the difference is a valid add-back. Show the buyer that your operational processes are so well-systematized that a replacement executive can step into the seat and achieve the same results without requiring an above-market compensation package.

Use your historical performance metrics to prove that the business runs on a disciplined management system, not on the individual heroics of overpaid employees. When you present a clear path for a transition at market-rate salaries, you turn a subjective argument into a structural proof, securing your normalized EBITDA.