The buyer's Quality of Earnings firm is arguing that our software development team payroll should be capitalized rather than expensed, which they claim artificially inflates our historical EBITDA. How do we defend our accounting treatment under IVS 105 standards to protect our enterprise value?

Question

Tyler Smith · Accepted Answer

The battle over software development payroll is a common tactic used by buy-side Quality of Earnings firms to push down your historical EBITDA and lower the purchase price. They want to argue that your internal developers were creating long-term assets that should have been capitalized on the balance sheet rather than expensed on the income statement. Under accounting rules and IVS 105 valuation standards, you must prove these costs were ongoing operational expenses required to maintain your current tech-enabled services, not capital expenditures for an entirely new software product. To defend your numbers, you need to present objective, operational proof of what your team was actually doing. This is where your EOS® historical records are invaluable. Pull the quarterly Rocks and weekly Scorecard data for your development team over the last three years. Show the auditors that your developers were focused on continuous optimization, routine maintenance, and running current automated workflows rather than building new, commercializable intellectual property. When you map their daily activities back to your operational seats and quarterly goals, you prove that these payroll costs are standard operating overhead. This allows you to defend your expensed payroll and resist their attempts to recalculate your EBITDA. Do not let them treat standard business maintenance as a capital expense just to lower their valuation multiple. Use your documented operating history to force them to accept your numbers.