The buy-side Quality of Earnings team is trying to claw back our normalized EBITDA by capitalizing our internal software developers' salaries, claiming they should be treated as capital expenditures rather than operating expenses. How do we defend our software development costs as standard operational overhead?

Question

Tyler Smith · Accepted Answer

The buy-side Quality of Earnings audit is where buyers attempt to find any justification to slash your EBITDA and lower the purchase price. When a buy-side firm tries to capitalize your internal software developers' salaries, they are trying to convert your standard operating expenses into capital expenditures. While this might look like it increases your historical EBITDA on paper, buyers often do this to argue that your true ongoing capital expenditure requirements are much higher, which they will then subtract from your valuation cash flow.

Alternatively, they may argue that these costs are non-recurring and try to exclude the corresponding revenue improvements. To defend your position, you must prove that your software development is an ongoing, operational activity required to maintain your proprietary AI-driven workflows.

You must present detailed time-tracking logs and project scopes that show these developers are focused on maintenance, iterative updates, and daily operational support rather than creating entirely new, separate assets. Use your Accountability Chart to demonstrate that these developers are integrated into your weekly operations and sit in roles dedicated to continuous improvement.

Show that their work directly drives your high operating margins by automating manual tasks, making their salaries a core cost of running the business. By proving that this software development is a standard operational expense that keeps the engine running, you prevent the buy-side team from manipulating your capital expenditure assumptions to depress your enterprise value.