In our buy-side Quality of Earnings review, the diligence firm wants to reduce our historical owner compensation add-back because replacing the founder requires hiring both an Integrator and a VP of Sales on the Accountability Chart. How do we defend our adjusted EBITDA against this dual-salary reduction?

Question

Tyler Smith · Accepted Answer

Buy-side Quality of Earnings firms routinely challenge owner compensation add-backs by inflating the theoretical cost to replace the exiting founder. If the owner historically managed leadership, operations, and business development, auditors often try to deduct two full executive salary packages against trailing twelve months EBITDA, destroying multiple turns of enterprise value.

You defend this adjustment by presenting your forward-looking Accountability Chart well before diligence begins. If existing department heads or account managers already manage operational execution and customer delivery, use documented quarterly Rocks, weekly Scorecard metrics, and GWC assessments to prove that current staff can absorb remaining responsibilities. Show that day-to-day operational leadership can be consolidated under a single operational Integrator rather than two high-salary hires.

Next, separate founder client relationships from systemic sales generation. If your revenue is driven by repeatable inbound channels, marketing automation, or institutional contracts rather than founder charisma, demonstrate that a replacement VP of Sales is either unnecessary or that the position pays for itself through gross margin expansion rather than a deduction from historical earnings.

Do not accept theoretical market compensation figures provided by the buyer's accountants. Force the firm to benchmark compensation against regional middle-market data and tie their proposed expense deductions directly to documented operational hours and actual business needs.