The following is a guest article by Peter Madara, founder and principal of GAAPTUS Consulting. The views expressed in this article are solely those of the author.

Every CFO knows that EBITDA tells a story, and discipline and rigor are key to building credibility and confidence in that story. But what if, even so, the story your EBITDA presents is understated relative to the underlying reality?

In private middle-market companies, we see a force quietly suppressing EBITDA: cumulative capitalization drift. This refers to the phenomenon where, as businesses scale, seemingly minor conservative accounting decisions accumulate over the years, gradually forming a systematic tendency to expense costs that qualify for capitalization under GAAP and that peers typically capitalize. The result is a systematic understatement of EBITDA, potentially leaving millions of dollars of enterprise value unrealized at exit.

Based on our work with companies, approximately one-third of businesses experience significant drift during expansion, with reported EBITDA quietly reduced by amounts that, while not meeting audit "materiality" thresholds, remain meaningful to stakeholders. For many companies, the impact typically represents 20% to 30% of overall audit materiality. In other words, if audit materiality is $10 million, EBITDA could be understated by $2 million to $3 million, which at a 10x multiple translates to a $20 million to $30 million reduction in potential equity value.

From Prudence to Hidden Drag

CFOs are often cautious about any proposal suggesting more costs should be capitalized, and rightly so. Past accounting scandals involving improper capitalization have led the industry to view capitalization more as a source of risk than of accuracy. As a result, many teams default to expensing small items that are somewhat ambiguous to judgment.

The challenge emerges as companies scale. Costs that once had minimal impact on EBITDA become significant in aggregate, but long-established expensing practices have become deeply ingrained and, in most cases, operate quietly, continuing to default qualifying costs to operating expenses. What began as well-intentioned conservatism gradually evolves into a hidden drag on EBITDA.

How Drift Hides in Plain Sight

Even when the impact reaches millions of dollars, cumulative capitalization drift rarely surfaces as a "problem." Paradoxically, two factors that signal good governance may actually help conceal it.

First, leadership often sets the right tone: capitalization must be well-supported, and costs that do not qualify must not be capitalized. This emphasis is healthy but naturally reinforces drift.

Second, rigorous processes apply the same treatment to the same costs year after year. This consistency supports comparability but also cements the initial expensing decision. Over time, these costs become embedded in operating expense budgets and actuals, making it difficult for period-over-period comparisons or budget-to-actual analyses to challenge them.

As a result, several silent dynamics keep drift below the radar:

  • Policy-practice disconnect.Written capitalization policies appear correct and aligned with GAAP, but in practice, a subset of qualifying costs is quietly expensed based on inherited, deeply rooted norms.
  • Below audit thresholds.In aggregate, the amounts fall well below audit materiality, posing no material misstatement risk, so external scrutiny is limited.
  • Dispersed rather than concentrated.The impact is spread across many small items and scattered across departments and general ledger accounts, rarely becoming a headline issue in audits or earnings quality reviews.
  • Recurring rather than one-time.These costs continue to arise as the business expands, so they are rarely viewed as "non-recurring" and typically do not appear as add-backs in adjusted EBITDA.

A Closer Look

Cumulative capitalization drift affects both internal labor and external costs. CFOs are often especially cautious about labor capitalization due to historical abuses, yet many straightforward cases that clearly qualify under GAAP are expensed due to drift.

Specifics vary by company and industry, but one cross-industry example we encounter is the IT department. Labor related to software implementations should be capitalized, but time spent by technical staff deploying new laptops is sometimes excluded from capitalization. As companies expand, hardware replacement becomes a rolling cycle, and qualifying capitalized labor for new laptop deployments can reach tens of thousands of dollars annually, yet remains in operating expenses. Individually, this may never grow large enough to attract attention in an audit or QoE review, but combined with other similar hidden items, it can accumulate into a significant impact on EBITDA.

In this context, it is worth emphasizing that companies that capitalize laptop deployment labor are not "aggressive"; they are simply applying GAAP as intended. Companies that do not capitalize bear a persistent EBITDA drag relative to peers.

What CFOs Can Do

For many PE-backed companies, when the current owner seeks an exit, the next sell-side QoE due diligence may uncover some favorable EBITDA impacts and treat them as add-backs. However, given the dispersed, individually immaterial, and subtle nature of cumulative capitalization drift, there is no guarantee these items will be identified; in fact, in the one-third of companies we observed, both buy-side and sell-side due diligence were performed when the current PE owner acquired, yet these EBITDA impacts still did not come into view.

Therefore, CFOs should consider conducting a mid-holding-period review to clear cumulative capitalization drift. Conducting such a review outside the pressures of a transaction timeline allows an assessment of whether capitalization practices have kept pace with the company's size and complexity, and identifies well-supported, GAAP-compliant capitalization opportunities—where prior conservatism exceeded what the standards require—bringing EBITDA quietly buried in operating expenses back into view, ensuring the full economic story is reflected in the numbers.