We are preparing for a buy-side Quality of Earnings audit and have significant owner-discretionary expenses we want to add back to EBITDA, but we know the auditors will challenge them. How do we document these personal expenses to guarantee they are accepted as valid adjustments?

Question

Tyler Smith · Accepted Answer

Buy-side Quality of Earnings auditors are paid to find reasons to reduce your EBITDA. If you cannot back up your add-backs with clear documentation, they will reject them, which directly lowers your transaction value. To protect your valuation, you must treat your add-backs with the same discipline you apply to your EOS® Scorecard. Build an audit trail for every single adjustment months before you go to market. This means separating owner-discretionary expenses from core operating costs on a transaction-by-transaction basis. For personal vehicles, club memberships, and non-business travel, keep detailed logs and invoices that prove these are not required to run the daily business. If you pay family members who do not actually work in the business, document their GWC™ status. If they do not GWC™ their seats, their compensation is a clear add-back, but you must prove their operational duties can be absorbed or eliminated without adding cost. Run an internal dry-run QoE with a specialized advisory firm. This investment allows you to IDS® any accounting weaknesses privately, rather than having them exposed by the buyer's team. Clear documentation changes the dynamic from a negotiation to a statement of fact.