The buyer's QofE firm is trying to recharacterize our R&D expenditures and software maintenance costs as operational expenses rather than capital expenditures, which is dragging down our EBITDA. How do we fight this accounting reclassification?

Question

Tyler Smith · Accepted Answer

When a buy-side Quality of Earnings firm reviews your books, their primary objective is to find reasons to normalize your EBITDA downward. A common target is software development or research and development costs that you have capitalized on your balance sheet. The auditor will argue these are recurring operating expenses that should reduce your net income. To defend your position, you must provide a clean breakdown of these expenses based on the actual output of your development team. Show the auditor how these investments directly created new, proprietary software assets that expand your gross substantial value, rather than simply maintaining existing code. Align this with your Accountability Chart: prove that the team members executing these projects are dedicated to new product creation, not day-to-day operations. If their GWC tests show their primary role is strategic product development, you have a strong case. You should also present a historical analysis showing how these capitalized assets have generated distinct, measurable revenue streams. Do not let them classify these as maintenance. If the auditor insists on adjusting them, counter by demanding a corresponding adjustment to your growth multiple, as these investments directly drive the future cash flows that the buyer is acquiring. Keep your documentation precise and refuse to accept standard industry averages that do not reflect your lean, high-efficiency development model.