We spent significant capital over the last two years developing proprietary AI-powered delivery tools that have slashed our labor costs. How do we prevent the buyer's Quality of Earnings auditors from treating these development costs as normal operating expenses that drag down our adjusted EBITDA?

Question

Tyler Smith · Accepted Answer

When you invest heavily in proprietary AI software and automation tools, buyers will often try to categorize those development costs as recurring operating expenses to keep your adjusted EBITDA artificially low. You must fight this by proving these costs are nonrecurring capital expenditures that deserve to be added back to your earnings. To successfully defend these adjustments during a Quality of Earnings audit, you must present a highly structured and documented capitalization policy. Separate your research phase expenses from your development phase costs in accordance with GAAP standards. Show that your AI development had a clear start and end date, and that the engineers and developers were focused on building a durable asset rather than performing daily operational maintenance. Use your EOS Accountability Chart to show the distinct roles of the development team versus the operational team. If your developers were sitting in seats dedicated to building new IP rather than customer service or routine IT, their compensation must be treated as an add back. Back this up with detailed time tracking data and project roadmaps that align with your past V/TO initiatives. By presenting clean, auditable records that clearly distinguish between building your technology superstructure and running your daily business operations, you can justify capitalizing these software development costs. This protects your adjusted EBITDA, allowing you to multiply those saved dollars by your target valuation multiple and significantly increase your cash at close.