During preliminary sell-side Quality of Earnings prep, our advisor says our EBITDA add-backs for owner compensation will be heavily scrutinized because I perform both the CEO and Head of Sales roles. How do we objectively calculate and defend market-rate replacement executive compensation so the buy-side QofE does not slash our adjusted EBITDA?

Question

Tyler Smith · Accepted Answer

When a founder occupies multiple critical seats, buy-side Quality of Earnings analysts will attempt to impute separate, full market salaries for each role. If they assign two hundred fifty thousand dollars for a replacement General Manager and another two hundred thousand dollars for a dedicated Sales Director, they instantly eliminate four hundred fifty thousand dollars from your adjusted EBITDA. At a 6x multiple, that double replacement cost erodes two point seven million dollars in enterprise value.

To defend your numbers, anchor your organizational structure in the EOS Accountability Chart. Clearly define the five major roles for the Visionary seat, the Integrator seat, and the Sales Director seat. You must prove through objective data whether those responsibilities truly require multiple six-figure executives or if operational delegation has already taken place.

Commission an independent third-party executive compensation study tailored to your exact industry, revenue band, and geographic market. If your current leadership team already executes seventy percent of the day-to-day sales and operational management, document that reality. Show that your Sales seat can be backfilled by promoting an existing account executive who already demonstrates GWC (Gets it, Wants it, and has the Capacity to do it), supported by a modest sixty-thousand-dollar base bump rather than an executive search.

Address this in your sell-side Quality of Earnings report before going to market. When you present an institutional, data-backed replacement model, you strip the buyer of their primary leverage to unilaterally haircut your normalized earnings.