We have significant capital expenditures on hardware and server infrastructure that we typically run through our operating expenses to lower our tax liabilities. How do we systematically separate these capital investments from our operational expenses during our exit runway to project a normalized and defensible EBITDA?

Question

Tyler Smith · Accepted Answer

Running capital expenditures through your operational expenses is a common strategy to minimize short-term tax bills, but it artificially depresses your EBITDA and directly reduces your enterprise valuation. Because buyers apply a multiple to your EBITDA, every dollar of capital expense that is incorrectly classified as an operating expense could cost you several dollars in net sale proceeds.

To correct this on your exit runway, you must work with your financial team to establish a strict capitalization policy that aligns with standard accounting practices. Identify all historical investments in hardware, server infrastructure, and custom software development that have a useful life of more than one year, and reclassify them as capital assets on your balance sheet rather than immediate operating expenses.

During your weekly Level 10 Meeting™, monitor the progress of these financial adjustments through your finance seat's quarterly Rocks. You need to prepare a detailed schedule of normalized EBITDA adjustments, commonly referred to as owner add-backs, to present to potential buyers.

This schedule must be thoroughly documented and backed by clear invoices and technical justifications, showing exactly how these expenses were capital-related. By systematically separating your capital investments from your true operating costs, you present a clean, defensible, and significantly higher EBITDA to buyers, ensuring you receive full value for the operational cash flow your business actually generates.