During the Quality of Earnings audit, the buyer's CPA firm is aggressively disallowing our pro forma EBITDA add-backs for one-time consulting fees and founder travel. How do we build an airtight audit trail to defend our normalized earnings?

Question

Tyler Smith · Accepted Answer

A buy-side Quality of Earnings (QofE) team has one job: dismantle your pro forma add-backs to push down adjusted EBITDA, which directly drops your purchase price. If your EBITDA multiple is seven, every single dollar of add-backs they eliminate strips seven dollars from your walk-away cash at the closing table.

To defend your numbers against an aggressive QofE team, subjective assertions must be replaced with clear documentation:

- Eliminate narrative explanations and produce source records. Do not just say a consulting fee was a one-time initiative. Present the specific statement of work, the termination letter, and evidence showing the project is completed and will not repeat.
- Separate true non-recurring expenses from maintenance capex. If you upgraded software infrastructure, prove that it replaced a legacy platform rather than serving as routine ongoing software support. Show invoice dates, vendor agreements, and operational sign-offs.
- Tie founder compensation add-backs to market data and the Accountability Chart. If you paid yourself above market, document every seat you personally occupied using your EOS Accountability Chart. Then, provide third-party executive salary benchmarking data demonstrating what it will actually cost to hire a qualified replacement to fulfill those specific operational responsibilities.
- Identify reciprocal add-backs the buyer missed. Go through your historical ledgers to find non-recurring revenue penalties, such as supply chain delays or one-off bad debts from clients who went bankrupt, and add those back to your earnings base.

Do not litigate add-backs over email. Run a structured defense session where your transaction CPA systematically addresses their adjustments line by line using empirical proof.