We are preparing for a sell-side Quality of Earnings review to avoid getting beaten up during the buyer's diligence, but we are unsure how to document our proprietary AI tools as legitimate adjustments to historical EBITDA. How do we present these operational efficiencies so the analyst accepts them as valid adjustments rather than normal operating expenses?

Question

Tyler Smith · Accepted Answer

To get a Quality of Earnings analyst to accept your AI-driven cost savings as a pro-forma adjustment to EBITDA, you must move beyond vague talk of technology and present hard, auditable operating data. Analysts look for run-rate adjustments that prove your current cost structure is permanently lower than your historical average. Start by matching your technology investments with your Accountability Chart history. If you deployed an AI system that automated customer support or scheduling, show the exact dates of implementation and the subsequent reduction in headcount or hours. Present a clear waterfall chart showing the historical labor spend, the date of the AI deployment, and the current, lower labor spend run-rate. You must prove that the labor reduction is permanent and that your current, automated operations can handle the same or higher volume. Next, use your weekly Scorecard history and your V/TO® to show that your operational metrics remained stable or improved after the automation. If customer response times remained low and error rates dropped while payroll decreased, you have objective proof of structural efficiency. Classify the initial software development and setup fees as one-time, non-recurring capital expenditures rather than ongoing operational costs. This moves those expenses out of your historical operating calculations and directly boosts your adjusted EBITDA. By presenting a clean, data-backed proof chain, you force the analyst to value your business based on its highly efficient current run-rate rather than its outdated historical cost structure.