The buy side Quality of Earnings team is trying to adjust our historical EBITDA downward by claiming our leadership team is underpaid relative to the market and that they must input a higher normalized compensation expense. How do we use our Accountability Chart and GWC to defend our historical payroll and protect our valuation multiple?

Question

Tyler Smith · Accepted Answer

Buy side auditors love to use normalized management compensation as a tool to chip away at your EBITDA. They will search for generic industry surveys to argue that your executive team is underpaid, attempting to add hundreds of thousands of dollars in simulated overhead that directly reduces your enterprise value. To defeat this tactic, you must present an objective, structure first defense of your organization. Bring out your EOS Accountability Chart. Show the auditors that your lean leadership structure is not an accident or a case of underpaying staff, it is a highly optimized operating model. Explain how your team members are GWC certified, meaning they get, want, and have the capacity to do their jobs. Because your people are in the right seats, they routinely handle responsibilities that would require double the headcount in a traditional, disorganized business. Provide concrete evidence of your operational efficiency. Share your historical Level 10 Meeting track record and show how your leadership team consistently hits their quarterly Rocks and numeric goals. This proves that your existing compensation is market rate for a highly automated, self managing team. If the buyer still insists on adjusting salaries upward, counter by tying those adjustments to post close performance metrics. If the buyer believes the roles require more expensive talent, let them fund those higher salaries out of their own post close operating budget, rather than discounting your hard earned historical EBITDA at the closing table.