The buy-side Quality of Earnings team is arguing that our owner salary add-back is too high because they will need to hire an expensive executive to replace us. How do we defend our historical EBITDA adjustments?

Question

Tyler Smith · Accepted Answer

During a Quality of Earnings review, one of the most common battlegrounds is the owner compensation adjustment. Buyers look to reduce your adjusted EBITDA by arguing that your current salary is below market rate for the work you actually perform, requiring a large replacement cost adjustment. If they succeed, your reported EBITDA drops, dragging your valuation down with it. To defend your numbers, you must present a clear, documented operational structure. This is where your Accountability Chart is your strongest defense. You must show the buyer exactly which seats you occupy and what the market rate is for those specific roles. If you have already transitioned your operational responsibilities to your leadership team, you can prove that you do not need a direct replacement. Show the buyer that your Integrator and department heads are already successfully running the business. If you still occupy a functional seat, use benchmarking data to show that your replacement cost is already fully accounted for in your financial model. Do not let the buyer make arbitrary assumptions about what it costs to run your business. By presenting a clean Accountability Chart and showing that your leadership team is already doing the heavy lifting, you shut down the buyer's attempt to artificially inflate your replacement costs and protect your hard-earned EBITDA adjustments.