Our buy-side Quality of Earnings auditor is trying to disqualify our historical owner-discretionary add-backs, claiming our personal lifestyle expenses are actually critical operational costs. How do we use our EOS tools to prove these expenses are entirely unrelated to the business running on its own?

Question

Tyler Smith · Accepted Answer

When a buy-side Quality of Earnings auditor challenges your add-backs, they are trying to push down your adjusted EBITDA and lower your purchase price. They will argue that the country club membership, personal vehicles, and family member salaries on your books are necessary to keep your operations running. To defend these add-backs, you must present a clean break between your ownership lifestyle and the company operating system. Your strongest weapon is your EOS Accountability Chart. You must show the auditor that every single seat on the chart is filled by a professional who possesses the skills to GWC (Get It, Want It, Capacity to Do It) their job. If a family member is on the payroll but does not occupy a seat on the Accountability Chart, or if their seat is purely administrative with no operational impact, you have clear proof that their salary is a discretionary add-back, not an operating expense. Furthermore, point to your documented processes and Scorecard. If the daily operations of the company are executed by your leadership team without your active involvement, then any owner-only expenses are demonstrably non-operational. You can show that the business achieves its weekly measurables and quarterly Rocks without these discretionary costs. This structural proof makes it incredibly difficult for the auditor to argue that your lifestyle expenses are required to sustain the historical run-rate EBITDA.