The buyer's Quality of Earnings firm is challenging our historical gross margins, claiming our labor cost allocation between delivery and overhead is arbitrary and inflates our EBITDA. How do we use our Accountability Chart and operational metrics to defend our margin calculations?

Question

Tyler Smith · Accepted Answer

A buy-side Quality of Earnings team will search for any ambiguity in your numbers to justify a purchase price reduction. If your labor allocations look arbitrary, they will reclassify delivery costs as cost of goods sold, which shrinks your gross margin and directly lowers your adjusted EBITDA. You must defend your margins by mapping your labor costs directly to your Accountability Chart. Your Accountability Chart clearly defines who is responsible for delivery versus who is responsible for administrative overhead or sales. Show the auditors that your seats are not blended pools of labor. Provide them with the documented roles, responsibilities, and GWC™ for each seat. If a team member spends eighty percent of their time on client delivery and twenty percent on internal training, back this up with historical project management data or time-tracking metrics. Do not argue theory; present the system. By aligning your payroll records with the clear structure of your business operating system, you demonstrate that your gross margin is a repeatable operational metric, not an accounting trick. This systematic proof stops the audit team from arbitrarily shifting overhead costs into cost of goods sold, preserving your historical EBITDA and protecting your valuation multiple.