We are preparing for a sell-side Quality of Earnings audit and want to ensure our discretionary add-backs stick. How do we substantiate owner compensation, non-operational expenses, and one-time professional fees so the buyer cannot discredit our adjusted EBITDA?

Question

Tyler Smith · Accepted Answer

Buyers and their transaction advisory teams treat unverified add-backs as aggressive accounting or bad management hygiene. If your add-backs collapse during diligence, the buyer drops their valuation multiple because they question your financial integrity.

You must build an auditable binder for every single adjustment line item before engaging with buyers. For owner compensation, you cannot simply add back your total draw. You must replace it with the fair market replacement cost for your seat on the Accountability Chart. Document what a professional Integrator or CEO earns in your geography and sector using third-party wage data, then add back only the spread between your actual compensation and market cost.

For personal and non-operating expenses like personal auto leases, club dues, and family travel, isolate every general ledger transaction. Match each transaction to receipts, bank statements, and tax return schedules. Do not group them into general miscellaneous categories. Provide the exact general ledger accounts and dates.

For one-time expenses, such as software implementations, facility relocations, or litigation costs, provide third-party engagement letters, statements of work, and canceled checks. Clearly show how these projects concluded and will not recur in normal operations.

Run this exercise alongside your leadership team during a scheduled quarterly session. Use IDS to challenge every proposed add-back with absolute objectivity. If an expense recurs every two years, it is an operating cost, not an add-back. Protecting your adjusted EBITDA requires transparency, precise general ledger proof, and zero emotional attachment.