The buyer's Quality of Earnings firm is treating our one-time investments in building our customized AI-powered operational systems as ongoing operating expenses rather than non-recurring add-backs. How do we defend these capital investments to protect our adjusted EBITDA?

Question

Tyler Smith · Accepted Answer

Quality of Earnings analysts often look for ways to reclassify capital investments as operating expenses to drive down your adjusted EBITDA and slash your multiple. If you have spent significant capital building customized AI-powered operational systems, you must fight to keep these classified as non-recurring capital expenditures or legitimate add-backs.

To defend your valuation, you must present a detailed ledger proving these engineering and software expenses were project-based, one-time initiatives designed to build a new capability, rather than ongoing maintenance costs.

First, segment your development costs. Show that the internal hours and external vendor fees were dedicated to a finite build phase that has a distinct start and end date. Once the system is live, the ongoing operating cost to maintain it is negligible.

Second, demonstrate the structural shift in your margins. Prove that this one-time expense has permanently reduced your long-term labor costs and increased your capacity. A true capital investment yields a permanent operational improvement, which justifies adding back the initial development costs to your historical EBITDA.

In your exit preparation, run a Step by Step Exit Business Integrity Review to audit these classifications before the buyer's analysts arrive. Document these AI workflows in your V/TO as core proprietary assets. This positions your technology as a valuable platform driver rather than an expensive operational headache, forcing the QofE team to accept your adjusted EBITDA calculations.