How do we successfully argue for an EBITDA add-back during the Quality of Earnings process for the historical costs of operational mistakes that we have permanently solved using AI automations?

Question

Tyler Smith · Accepted Answer

During the buy-side Quality of Earnings process, auditors will scrutinize your historical expenses, often trying to classify temporary operational mistakes as permanent run-rate costs. To defend your valuation multiple, you must successfully argue for a normalization adjustment based on the dumb tax you paid during historical trial-and-error phases that have now been permanently resolved.

To win this argument, you must present empirical proof of structural operational changes. If you previously spent money hiring temporary consultants or manual data-entry staff to fix a broken pipeline, and you have since replaced that friction with automated workflow solutions, document this transition clearly.

Show the auditors the before-and-after workflow charts. Demonstrate that the manual labor costs are gone, the software licenses are paid, and the efficiency gains are permanent. Frame these historical expenses not as standard operating costs, but as one-time capital investments in process design.

This is where your EOS framework pays off. Bring your historical Accountability Chart and past quarterly Rocks to the negotiation table. Show how you systematically identified these operational bottlenecks, solved them, and removed the corresponding labor costs from your run-rate. By proving the cost reduction is structural, you defend your EBITDA and preserve your multiple.