During the buy-side Quality of Earnings audit, the buyer's accountants are rejecting our owner compensation addbacks, claiming we would have to pay a market-rate CEO the same amount anyway. How do we defend these normalized adjustments to protect our EBITDA?

Question

Tyler Smith · Accepted Answer

When a buy-side Quality of Earnings firm targets your owner compensation, they are looking to lower your adjusted EBITDA and chip away at your valuation. If you have been acting as a visionary who is already replaced operationally by a strong Integrator, you have a clear path to defend these addbacks. You must show that your daily operational responsibilities have already been successfully transitioned to your leadership team.

Use your Accountability Chart to demonstrate that the seats you occupy do not require a high-priced replacement. If your leadership team is already running the day-to-day operations and hitting their quarterly Rocks without your constant intervention, the buyer does not need to hire a replacement CEO at your historical compensation level. You can prove that a market-rate manager would cost significantly less, or that the role is already absorbed by existing team members who have the GWC™ to handle the responsibilities.

Provide the buyer with your clear Level 10 Meeting™ history and operational data to show that decision-making has been decentralized. Under standard valuation approaches, adjustments to owner compensation are entirely justified if the owner is no longer the sole operational hub of the business. By proving your leadership team runs the machine, you protect your adjusted EBITDA and maintain your premium multiple.