The following is a guest post from Peter Madara, founder and principal at GAAPTUS Consulting. Opinions are the author’s own.
Every CFO knows EBITDA tells a story, and that discipline and rigor are what build credibility and confidence in that story. Yet what if, despite all of that, the story your EBITDA is telling is still downplayed relative to the underlying reality?
Across privately held middle market companies, we see a quiet force suppressing EBITDA: Cumulative capitalization drift. This is when small conservative accounting decisions, each negligible on its own, compound over years as a company scales into a subtle structural bias toward expensing costs that otherwise qualify for capitalization under GAAP and are routinely capitalized by peers. The result is systematically understated EBITDA and potentially millions in enterprise value that may never be realized at exit.
In our experience working with companies, about one-third had experienced significant drift as they scaled, with reported EBITDA quietly reduced by amounts that were not “material” for the audit but still meaningful to stakeholders. For many of them, the effect typically ranged from 20-30% of overall audit materiality. Put differently, if audit materiality is $10 million, the effect can be as much as $2-3 million EBITDA underestimation, equivalent to $20-30 million of potential equity value at a 10x multiple.
From healthy caution to hidden drag
CFOs often approach any suggestion that more costs could be capitalized with caution, and rightly so. Past accounting scandals involving illegitimate capitalization have conditioned the profession to see capitalization more as a source of risk than as a source of accuracy. As a result, many teams default to expensing small items that feel ambiguous to the individual making the judgment.
The challenge emerges as businesses scale. Costs that once barely moved the EBITDA needle in aggregate become meaningful, yet long-standing expensing practices, now deeply ingrained and operating largely under the radar, continue to send costs that meet capitalization criteria to operating expenses by default. What began as well-intentioned conservatism gradually turns into a quiet drag on EBITDA.
How drift hides in plain sight
Even when the impact reaches millions of dollars, cumulative capitalization drift rarely shows up as a discrete “issue.” Paradoxically, two of the very things that signal strong governance can actually help keep it hidden.
First, leadership often sets the right tone at the top: Capitalization must be well supported, and non‑qualifying costs must not be capitalized. That emphasis is healthy, but it naturally reinforces drift.
Second, disciplined processes apply the same treatment to the same costs year after year. That consistency is helpful for comparability, but it also locks in the original expensing decision. Over time, those costs become embedded in OpEx budgets and actuals, making them unlikely to be questioned through period‑over‑period or budget‑to‑actual analysis.
From there, several quiet dynamics keep drift below the radar:
- Policy and practice divergence. On paper, the written capitalization policies say all the right things and mirror GAAP, but in practice, a small subset of qualifying costs is quietly expensed based on inherited, embedded norms.
- Below audit thresholds. In aggregate, the amounts tend to sit comfortably well below audit materiality and do not create a risk of material misstatement, so they attract limited external focus.
- Dispersed, not concentrated. Because the impact is spread across many individually small items and dispersed across departments and GL accounts, it rarely adds up to a headline issue in an audit or quality of earnings review.
- Recurring, not one time. These costs arise on an ongoing basis as the business scales, so they are rarely treated as “nonrecurring” and typically never appear as adjusted EBITDA add-backs.
A closer look
Cumulative capitalization drift affects both internal labor and external costs. CFOs often approach labor capitalization with heightened caution because of past abuses, yet many straightforward cases that clearly qualify under GAAP still end up expensed due to drift.
Specifics vary by company and industry, but one example we’ve encountered that cuts across industries is in IT departments. Labor related to software implementations is properly capitalized, but the time technicians spend deploying new laptops is sometimes excluded from capitalization. As the company scales and hardware replacement becomes a rolling cycle, eligible capitalizable labor for new laptop deployment can climb into the tens of thousands of dollars per year, yet continues to be recorded in OpEx. On its own, this may never be large enough to raise concern in an audit or QoE review, but combined with similar under-the-radar items, it can add up to a meaningful EBITDA impact.
In that context, it’s worth underscoring that the companies that did capitalize laptop deployment labor were not being “aggressive”; they were simply applying GAAP as intended. Those that did not capitalize it carried a persistent drag on EBITDA relative to peers.
What CFOs can do
For many PE-backed businesses, the next sell‑side QoE diligence when current owners look to exit might surface some of these favorable EBITDA impacts as add‑backs. However, given how dispersed, individually immaterial and subtle cumulative capitalization drift tends to be, there is no guarantee these items will be identified; in fact, in most of the one‑third of the companies we observed, both buy‑side and sell‑side diligence had been performed when the current PE owners acquired them, yet these EBITDA impacts still had not appeared on the radar.
CFOs should therefore consider a mid‑hold review to flush out cumulative capitalization drift. Conducted outside the pressure of a transaction timeline, these reviews assess whether capitalization practices have kept pace with the company’s scale and complexity and identify defensible, GAAP-compliant capitalization opportunities where prior conservatism has gone further than the standards require, bringing EBITDA that has been quietly buried in OpEx back into view and ensuring the full economic story is reflected in the numbers.
