The buyer's Quality of Earnings firm is trying to reclassify our software subscription expenses and internal engineering labor as capitalized software development costs to artificially lower our historical operating expenses and EBITDA. How do we defend our classifications?

Question

Tyler Smith · Accepted Answer

Quality of Earnings analysts earn their keep by finding adjustments that drive down your historical EBITDA, and shifting operating expenses to capital expenditures is a common tactic. If they can argue that your software costs or internal development labor should have been capitalized rather than expensed, they will try to establish a lower baseline for your true recurring operating cash flow, ultimately depressing your valuation multiple. To defeat this tactic, you must present airtight operational documentation. Provide the analysts with your historical Accountability Chart and specific job descriptions to prove that your internal engineering labor was dedicated to routine platform maintenance and customer support, not to creating new, capitalized intellectual property. If your team spent their time keeping current systems running rather than building new products, those wages are strictly operating expenses. Next, back this up with your quarterly Rock history. Show that your engineering team was focused on maintaining operational efficiency, as tracked weekly on your EOS® Scorecard, rather than long-term capital development projects. By proving that your software subscriptions are critical, ongoing tools used daily to run your automated workflows, you make it impossible for them to categorize these expenses as one-time capital investments. Do not let them turn standard operational expenses into capitalized items just to manipulate the EBITDA calculation. Stand firm with data that shows these costs are the regular, necessary fuel for your business engine.