Owner compensation adjustment

Owners rarely pay themselves a market wage. Some take far more than the role is worth for tax reasons, some take almost nothing and live on distributions. Neither figure tells a buyer what the business earns, so it gets normalized. The market figure is the replacement wage: what it would cost to hire someone to do what the owner does. The critical part, and the most common error in small-business valuations, is that Adjusted EBITDA and SDE handle this DIFFERENTLY and you must not do both: For Adjusted EBITDA, you adjust owner pay TO the replacement wage. The business is assumed to keep paying someone to do that job, so only the excess above market is added back. For SDE, you add back the owner's ENTIRE compensation. SDE deliberately assumes one working owner, and the buyer stepping in takes both the role and the pay. Doing both, adding back the full salary and then also applying the excess-over-market adjustment, double-counts the owner and inflates earnings by the replacement wage. On a business worth a few million that single error can move the valuation by six figures.

• Adjusted EBITDA
• Discretionary earnings add-backs
• Quality of Earnings (QoE)
• Seller's Discretionary Earnings (SDE)

• Accurate accounting doubled business value
• EBITDA and SDE and Multiple Explained