The buyer's Quality of Earnings audit is aggressively rejecting our proposed add-backs for an expensive ERP implementation, founder vehicle leases, and one-off severance packages. How do we rigorously validate owner-discretionary add-backs to protect our baseline EBITDA?

Question

Tyler Smith · Accepted Answer

Buy-side Quality of Earnings teams are hired to cut your EBITDA because every dollar eliminated reduces the purchase price by four to eight times that amount. When auditors challenge discretionary add-backs, general explanations fail. You need verifiable documentation that proves each expense is either completely non-recurring or entirely discretionary.

For an ERP implementation, auditors routinely argue that technology upgrades are ongoing maintenance CapEx. To defeat this challenge, isolate the project invoices. Separate one-time implementation fees, legacy data migration costs, and outside consulting payments from standard ongoing annual software subscription licenses. Show your leadership team Rocks and project plans confirming the implementation has an explicit completion date. Agree that future software maintenance belongs in ongoing operating expenses, but insist that the multi-year implementation cost is an extraordinary, non-recurring event.

For founder personal perks like vehicle leases, club dues, and family travel, point directly to general ledger entries and payroll records. You must demonstrate that these expenses provided zero operational benefit to the ongoing business enterprise and that no replacement expense will be incurred post-sale under the buyer Accountability Chart.

For severance packages, produce the signed severance agreements, proof of payment, and organizational chart changes showing the positions were permanently eliminated rather than refilled. If the termination was part of an operational restructuring that streamlined operations, show the resulting permanent wage reduction. Categorize each add-back with supporting invoices and bank proofs so the auditor has zero factual basis to reject them.