Operating expenses encompass all costs incurred in running a company's core business — cost of goods sold, personnel costs, occupancy, depreciation, marketing, IT and general administration. They are the primary driver of EBITDA margin and the focus of earnings quality analysis in financial due diligence. Normalisation of operating expenses — removing non-recurring items, above-market related party transactions and accounting policy anomalies — is the central objective of every quality of earnings review. Their multi-year trend reveals the company's cost discipline and competitive dynamics.

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Example: a Swiss B2B services company shows operating expenses growing from CHF 7.7 million to CHF 9.5 million (+23%) over 3 years against revenue growth of only 15%. The margin scissors — costs outpacing revenues — is explained by a 35% increase in personnel costs and new office lease costs. Due diligence concludes that CHF 600,000 of these cost increases are structural and permanent, reducing the normalised EBITDA and the valuation accordingly.

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Hectelion analyses operating expense trends and their drivers as the primary operational quality indicator in every due diligence and valuation engagement.