Salary Adjustments as EBITDA Normalisation
Owner and management salary adjustments are among the most common EBITDA normalisations. Learn when they apply, how to calculate them, and how to defend the position.
Salary normalisation is one of the most frequently encountered EBITDA adjustments in the due diligence of owner-managed businesses and private equity-backed companies with closely held management teams. Understanding how to identify, calculate, and defend these adjustments is a core skill in Transaction Services.
Why Owner and Management Salaries Need Normalising
In privately owned businesses, the owner has discretion over how they extract value from the business. Common patterns that distort the P&L include:
- An owner-manager drawing a salary significantly below market rate, effectively subsidising the business's profitability
- Conversely, an owner drawing an above-market salary (or employing family members at above-market rates), which inflates the cost base
- Dividend income structured as salary for tax efficiency, with no corresponding management service
- Multiple family members on the payroll in roles with unclear commercial justification
None of these is inherently problematic from an accounting perspective, but they all distort the earnings base that a buyer is paying a multiple on. The purpose of the adjustment is to replace actual remuneration with a market-rate equivalent.
How to Calculate the Adjustment
The adjustment is the difference between actual remuneration paid and the market-rate equivalent for the role being performed:
Adjustment = Market rate salary − Actual salary paid
A positive number is an upward adjustment to normalised EBITDA (actual pay was above market — removing the excess increases EBITDA). A negative number is a downward adjustment (actual pay was below market — adding the market cost reduces EBITDA).
Determining the Market Rate
Market rate is usually established by reference to:
- Published salary surveys for comparable roles by function, geography, and company size
- Recruitment agency data or third-party benchmarking
- Comparable public company executive compensation disclosures
- The buyer's own remuneration benchmarks if the management team is being retained post-deal
The choice of benchmark should be documented and defensible. Sellers will challenge any benchmark that appears inflated.
Common Scenarios
Below-Market Owner Salary
An owner who draws €60,000 per year to act as CEO of a €10m revenue business is almost certainly underpaid relative to the market. If a market-rate CEO costs €150,000, the normalised EBITDA is reduced by €90,000. A buyer must fund this additional cost post-acquisition.
Above-Market Remuneration
A family-run business where the owner, spouse, and two adult children all draw director-level salaries — but only one has a genuine commercial role — may be overstating costs by several hundred thousand euros per year. Removing the excess increases adjusted EBITDA.
Hybrid Arrangements
Some owners take a below-market salary but also extract value through rental income (if they own the premises), management service fees, or director's loans. These need to be considered together to get a complete picture of the owner's total economic extraction.
Presenting the Adjustment in the QoE Report
Salary adjustments appear as normalisation adjustments in the EBITDA bridge, typically under a "management remuneration" or "owner remuneration" heading. The report section should include:
- A description of the adjustment and who it relates to
- The basis for the market rate benchmark
- The year-by-year impact (the salary may have changed during the review period)
- Any assumptions about post-deal management structure (if the owner is leaving, a full replacement cost; if staying, a market-rate top-up)
Owner remuneration adjustments appear in the vast majority of SME and mid-market FDD engagements. Our programme covers 150+ EBITDA adjustment examples across 8+ realistic case studies, including salary normalisation scenarios. Full access for €119.99.