During our sell-side Quality of Earnings prep, we need to prove our owner compensation add-backs are legitimate operational adjustments rather than just aggressive accounting. How do we document our replacement costs and organizational changes to survive the buy-side auditor's knife?

Question

Tyler Smith · Accepted Answer

Buy-side Quality of Earnings auditors are paid to look for reasons to reduce your adjusted EBITDA. One of their favorite targets is the owner compensation add-back. If you pay yourself above market rate and plan to step away, you will want to add back the excess to inflate your EBITDA. To make these adjustments stick, you must back them up with objective operational evidence.

Start by using your EOS Accountability Chart to decouple your role as an owner from your functional roles as an employee. If you are acting as both the Integrator and the head of sales, you must document the market rate replacement cost for each seat. Do not just guess. Pull localized salary surveys and obtain formal recruiting quotes for these specific seats.

If you have already elevated team members to run these functions, show the historical payroll transition. Prove that your day-to-day operational duties have already been absorbed by your leadership team. When you can show a buyer that your leadership team is already running the Level 10 Meeting and hitting their Rocks without your daily involvement, the auditor cannot argue that a high-priced replacement executive is needed.

By presenting a clear GWC analysis for the team members filling your former seats, you prove the business is truly self-sustaining. This operational proof transforms your owner salary add-back from an accounting trick into a bulletproof adjustment that the buyer's Quality of Earnings firm must accept.