The buy-side Quality of Earnings auditor is stripping out our founder salary adjustment because we do not have a formal employment agreement in place. How do we defend this owner compensation add-back to protect our valuation?

Question

Tyler Smith · Accepted Answer

When a buyer's Quality of Earnings auditor attacks your owner compensation add-back, they are testing your operational documentation. If you have been paying yourself a fluctuating salary without a formal employment contract, the auditor will argue that your replacement cost is much higher, which reduces your adjusted EBITDA and shrinks your enterprise value.

To defend this adjustment, you must replace the subjectivity with market-based facts. Start by defining the exact roles you perform on the Accountability Chart. If you are acting as both the Visionary and the head of sales, document those dual seats clearly.

Next, obtain third-party compensation benchmarking data for your metropolitan statistical area. Show the average market rate for an executive fulfilling those specific seats. Present this as a formal replacement plan, proving that a competent Integrator or sales manager could be hired at this documented rate.

By presenting a clean, market-rate replacement cost backed by real salary data, you convert a defensive debate into a transparent operational handoff. This aligns with the principle of substitution found in traditional valuation approaches, where the cost to replace an asset or function determines its economic value. Do not let the auditor treat your historical distributions as a necessary operational expense. Show them the exact cost to run your Accountability Chart without you, lock in the add-back, and protect your multiple.