The buy-side Quality of Earnings firm is digging into our normalized EBITDA adjustments, specifically our capitalization of software development costs and owner's discretionary expenses. How do we defend these add-backs without looking like we are cooking the books?

Question

Tyler Smith · Accepted Answer

To defend your normalized EBITDA adjustments, you must move away from defensive posturing and present a clear, data-backed operational narrative. Buy-side firms look for inconsistency. If you capitalized software development costs, you must prove these investments created a long-term operational asset under IVS 105, rather than merely masking recurring maintenance expenses. Use your EOS Scorecard historical data and project management records to show exactly which developer hours were spent on building new proprietary capabilities versus fixing temporary bugs. For owner discretionary expenses, provide clean receipts, general ledger detail, and a clear explanation of why these expenses will not recur post-transaction. You should also define a realistic replacement salary for yourself. If you are doing the job of three people, you cannot claim a market-rate replacement of fifty thousand dollars. Use your EOS Accountability Chart to show exactly which seats you occupy and what it will cost the buyer to hire professional managers to run those seats. This transparency builds credibility. When you show a buyer a highly disciplined, systemized operational model where every dollar spent is mapped to a clear seat or Rock, their ability to chip away at your adjustments disappears. You are no longer arguing about accounting tricks; you are showing them the actual run-rate of a self-sustaining business machine.