The buy-side Quality of Earnings firm is trying to disqualify our owner add-backs, claiming we need to hire a highly paid chief operating officer to replace my daily strategic responsibilities. How do we defend our historical EBITDA adjustments during this audit?

Question

Tyler Smith · Accepted Answer

Buy-side Quality of Earnings auditors love to chip away at your normalized EBITDA by claiming your personal active involvement in the business requires a costly replacement executive. If they can successfully argue that your departure requires a two hundred thousand dollar replacement salary, they can multiply that reduction by your deal multiple to shave over a million dollars off your enterprise value.

You must defend your adjustments by showing that your role has already been systematized and decentralized. The best tool to defeat this argument is a clean Accountability Chart. Show the auditors that the major business functions are already owned by highly capable leadership team members who possess the GWC, meaning they get it, want it, and have the capacity to do it.

If you have delegated the daily operational leadership to an Integrator who is already compensated at market rate, you can prove that your remaining owner responsibilities are purely visionary or strategic. Present the auditors with your historical Level 10 Meeting notes and quarterly Rocks to demonstrate that the leadership team, not you, has been driving the execution of the V/TO.

When you can prove that the business runs on your system rather than your personal relationships, the auditor's argument for a replacement salary deduction collapses. This keeps your add-backs intact and preserves your maximum valuation.