We are entering a buy-side Quality of Earnings review and the buyer's accountants are aggressively targeting our software-related capitalized R&D costs, arguing they should be expensed, which would slash our adjusted EBITDA by fifteen percent. How do we defend our capitalization policy using our operational software development records and keep our valuation intact?

Question

Tyler Smith · Accepted Answer

When a buy-side Quality of Earnings team targets your capitalized research and development costs, they are trying to shift those investments into operating expenses to slash your adjusted EBITDA. To defend your valuation, you must present empirical operational evidence that proves these activities generated long-term assets, not routine maintenance.

Start by matching your capitalized payroll costs directly to specific projects and releases. Use your historical EOS Accountability Chart to show which software engineers were dedicated exclusively to new product development versus those handling customer support and bug fixes. The engineers in the product development seat should have clear GWC definitions that align with asset creation.

Next, back up your financial records with project tracking data. Show them the specific sprint cycles, code commits, and project milestones that correspond to the capitalized hours. This transforms a dry accounting debate into an operational reality that their analysts cannot easily dismiss. You must prove that these capitalized costs resulted in proprietary, scalable intellectual property that creates future economic value.

If the buyer's accountants still push back, show how these capitalized tools directly contribute to your high-margin recurring revenue. Frame these R&D investments as capital expenditures required to build the platform, not ongoing costs of doing business. By presenting a clean trail of operational accountability, you can defend your capitalization policy and preserve your EBITDA multiple.