We have invested heavily in our operating system and leadership development over the last two years, which has temporarily reduced our net income. How do we defend these implementation costs as valid EBITDA add-backs during a Quality of Earnings audit so we do not get penalized on our valuation multiple?

Question

Tyler Smith · Accepted Answer

During a Quality of Earnings audit, the buy-side accounting team will review your financial statements to identify your true, normalized operating earnings. To protect your valuation, you must defend any strategic investments you have made as valid EBITDA add-backs.

This includes the capital you have invested in implementing your operating system, hiring a professional EOS® Implementer, and training your leadership team. These costs should be classified as non-recurring, strategic investments rather than standard, ongoing operating expenses. They represent one-time expenditures designed to build a scalable organizational infrastructure.

To make these add-backs defensible, maintain meticulous records of all related expenses, including consulting fees, software implementation costs, and recruiting fees. Present these records to the auditors alongside your EOS® documentation, demonstrating that these investments have successfully created a self-sustaining management structure. By proving these costs are non-recurring and have successfully de-risked the business for the next owner, you can preserve your target valuation and prevent the buyer from penalizing your EBITDA.