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.
In privately owned businesses, the owner has discretion over how they extract value from the business. Common patterns that distort the P&L include:
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.
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).
Market rate is usually established by reference to:
The choice of benchmark should be documented and defensible. Sellers will challenge any benchmark that appears inflated.
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.
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.
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.
Salary adjustments appear as normalisation adjustments in the EBITDA bridge, typically under a "management remuneration" or "owner remuneration" heading. The report section should include:
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.
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