I pay myself a below-market salary but take large, irregular distributions. How do we normalize our executive compensation today so our historical EBITDA is clear and defensible to a buyer?

Question

Tyler Smith · Accepted Answer

Below-market owner salaries are a red flag during a Quality of Earnings audit. Buyers want to see what it actually costs to run the business with a professional management team. To clean this up before you go to market, you must normalize your historical financial statements.

Start by defining your exact roles on the Accountability Chart. If you are acting as both the Visionary and the Integrator, research the market rate for hiring professionals to fill those specific seats. Work with your CPA to adjust your historical profit and loss statements, adding back your actual compensation and distributions, and subtracting the estimated market-rate salaries for those seats.

This process, known as adjusting or normalizing EBITDA, must be documented with clear, third-party salary data. If you wait for the buyer's analyst to do this, they will likely overestimate the cost of replacing you, which will artificially depress your EBITDA and lower your valuation. By proactively normalizing your executive compensation, you present a clean, defensible set of financials that shows the true profitability of the operating business. This transparency builds trust with potential buyers and prevents unexpected purchase price adjustments during the late stages of due diligence.