Your add-backs won't survive. Here's what a QoE team does to owner earnings

Somewhere in your data room is a page that says EBITDA is $2.45m, “normalised” to $2.9m. The buyer's quality-of-earnings team exists to attack the gap - and in most founder businesses, part of it does not survive. Here is where they look first, in order.

Owner remuneration. The classic add-back: the owner pays themselves $420K, market rate for a replacement GM is $240K, so $180K comes back. Defensible - if the benchmark is real, sourced and role-matched. What fails: adding back the whole salary (someone must run the business), benchmarking against the cheapest possible hire, or forgetting the family members on the payroll doing real jobs.

One-off costs. The legal dispute, the rebrand, the flood. Genuine one-offs are addable - once. What fails: “one-offs” that recur annually in different costumes. A QoE team lines up three years of them; if every year has $150K of unique disasters, that is not noise, that is the business.

Related-party pricing. Rent paid to the family trust below market helps EBITDA today and hurts it in diligence - the buyer will restate to the market rent they will actually pay. This one cuts both directions, and owners are routinely surprised: sometimes normalisation increases earnings. Get an independent appraisal and restate first, whichever way it goes.

Revenue recognition. Deferred income taken early, milestones recognised optimistically, December invoices for January work. Nothing here needs to be improper to be a problem - inconsistency is enough. The tie-out question is simple: does the pattern of recognition match the pattern of cash? If not, expect the earnings base to be re-cut, not debated.

The recurring-revenue claim. The premium multiple rides on this one. “60% recurring” must survive contract-to-ledger tie-out: signed terms, renewal evidence, churn cohorts. Repeat customers are habits, not contracts. Fail this test and you lose more than the premium - you lose credibility on every other number in the room.

Working capital normality. Not strictly an add-back, but the same forensic mindset: if you have quietly stretched creditors and run down stock in the year before sale, the cash the business “generates” is partly borrowed from its own future. The peg negotiation will find it.

Margin trajectory. A margin that jumped in the final year gets decomposed: price, volume, mix, or deferral of costs? Two of those four are worth paying for. The team will find out which two you have.

How to hold the line: run the QoE on yourself first. Evidence every adjustment, benchmark every benchmark, kill the indefensible add-backs before a buyer uses them to kill the defensible ones. A normalisation schedule that survives contact is worth more than an optimistic one that collapses in week three - because in that room, credibility is the multiple.