We are preparing a sell-side Quality of Earnings report and want to add back our above-market owner compensation while also accounting for new leadership hires made mid-year. How do QoE auditors evaluate run-rate leadership adjustments?

Question

Tyler Smith · Accepted Answer

Quality of Earnings (QoE) analysts scrutinize owner compensation and leadership adjustments to calculate the actual recurring operational cost of running your business. You cannot simply add back every dollar of founder pay while ignoring the real cost to replace your role.

Auditors dissect owner compensation through market-rate benchmarking. If you took one million dollars in total compensation but a qualified Integrator on your Accountability Chart commands two hundred fifty thousand dollars, the net add-back is seven hundred fifty thousand dollars. The replacement cost must be fully accounted for in the pro forma earnings.

When handling mid-year leadership additions, auditors look at run-rate adjustments. If you hired a VP of Sales six months ago at a two hundred thousand dollar annual salary, you only recognized one hundred thousand dollars in trailing twelve-month expense. A buy-side QoE will subtract the remaining one hundred thousand dollars from your adjusted EBITDA because the full cost will recur annually.

To defend your numbers:

- Build a clean Accountability Chart showing which seat each leader occupies and eliminate overlapping founder responsibilities.

- Commission an independent executive compensation study to establish defensible market-rate replacement figures rather than guessing.

- Demonstrate operational autonomy by proving that the leadership team, not the founder, owns the core Rocks and runs the Level 10 Meeting rhythm without intervention.

Document these organizational realities early. A sell-side QoE that presents defensible run-rate adjustments preserves your valuation multiple and eliminates contentious audit disputes during buyer diligence.