The buy-side Quality of Earnings firm is digging into our historical financials and trying to subtract our owner-operator compensation add-backs, claiming we underpaid ourselves relative to market rates for a CEO. How do we defend our adjusted EBITDA during a hostile QofE audit?

Question

Tyler Smith · Accepted Answer

During a buy-side Quality of Earnings audit, the buyer's accounting firm will aggressively target your adjusted EBITDA. One of their favorite tactics is attempting to write down your owner-operator compensation add-backs. If you paid yourself fifty thousand dollars a year but a replacement CEO would cost two hundred thousand dollars, they will try to subtract one hundred and fifty thousand dollars from your EBITDA, crushing your valuation.

To defend your numbers, you must present a clear, documented operational structure. This is where your EOS Accountability Chart is highly valuable. You must show that the seat you are vacating is already accounted for, and that your responsibilities have been systematically distributed to your leadership team. If you have a solid Integrator running the day-to-day operations, you can prove that a high-priced replacement CEO is not required.

Provide empirical salary data for your specific region and industry to show that your leadership team is already compensated at market rates. Back up your adjustments with a completed Business Integrity Review that proves your operational efficiency. When you show the auditors that your business operates via a decentralized leadership team rather than relying on a single owner, you take away their primary justification for adjusting your replacement compensation costs downward.