The buy side Quality of Earnings firm is challenging our EBITDA add-back for the owner's salary, arguing that hiring a general manager to replace the exiting owner will cost just as much, thereby wiping out our adjustment. How do we defend this add-back to protect our enterprise value?

Question

Tyler Smith · Accepted Answer

This is a classic tactic used by buy side Quality of Earnings firms to slash your adjusted EBITDA and drive down the ultimate purchase price. They assume that because you are the owner, your entire salary must be replaced by a single, high priced executive. You must dismantle this assumption by presenting a clear, objective view of how your organization actually functions. Bring your EOS Accountability Chart to the negotiation table. Show the auditors that your seat as the owner has already been systematically decentralized. Prove that your leadership team members already have the GWC, meaning they get it, want it, and have the capacity to do it, for their respective seats. Demonstrate that the operational responsibilities have been absorbed by your Integrator and department heads, who are already paid market rates. Show the QofE firm that you have transitioned your daily activities to merely attending the weekly Level 10 Meeting and reviewing the weekly scorecard. You are not running the day to day operations. Therefore, the replacement cost is not a full executive salary, but rather a fractional administrator or a minor adjustment to existing salaries. By proving that your operating system has institutionalized your role, you show that the business runs without your daily input. This protects your full salary add back and elevates your business into a lower risk category, which justifies a higher multiple. Do not let them treat your owner distribution as an operating expense when your leadership team is already doing the heavy lifting.