The buy-side Quality of Earnings auditor is challenging several of our personal and discretionary expenses that we added back to EBITDA, claiming they are actually necessary operating expenses. How do we defend our owner add-backs and keep them from slashing our enterprise value?

Question

Tyler Smith · Accepted Answer

During a Quality of Earnings audit, the buyer's goal is to minimize your adjusted EBITDA. Every dollar of add-backs they disqualify directly reduces your purchase price by your valuation multiple. If you have a five million dollar EBITDA valued at a six times multiple, losing just fifty thousand dollars of add-backs costs you three hundred thousand dollars at close.

To defend your add-backs, you must present airtight documentation. Discretionary expenses, such as personal vehicles, country club memberships, and family members on the payroll who do not work in the business, must be clearly separated from normal operating expenses.

Use your EOS Accountability Chart to prove that these expenses are truly discretionary. If a family member is on the payroll but does not hold a seat on the Accountability Chart or have defined roles and responsibilities, they do not GWC the job. This is proof that their salary is a pure owner benefit that will not recur post-transaction.

For discretionary travel or personal marketing expenses, show how these activities do not impact the core lead-generation machine of the business. If the business can run successfully without these expenses, they are legitimate add-backs. Keep your files clean, provide the receipts, and do not let the auditor treat your personal perks as necessary operating costs.