We are preparing our business for sale and running a sell-side Quality of Earnings report, but our deal advisors disagree on how to normalize owner compensation on our Accountability Chart. How should we benchmark and defend replacement leadership salaries to maximize adjusted EBITDA without getting penalized in buy-side diligence?

Question

Tyler Smith · Accepted Answer

In a sell-side Quality of Earnings analysis, owner compensation add-backs are among the most heavily contested line items. Owners frequently pay themselves above-market distributions or take below-market salaries to manage tax exposure. Both extremes create friction with buyers.

The most dangerous mistake is adding back the full owner compensation while assuming a single executive salary replaces you. If an owner acts as Visionary, leads key sales accounts, and oversees operations, a buyer will argue that three people are required to replace those functions. This can slash your adjusted EBITDA by hundreds of thousands of dollars.

To defend your normalization adjustments:
- Map every duty of the exiting owner directly to seats on your EOS Accountability Chart. Clearly show where responsibilities have already transitioned to existing leadership team members who have GWC (get it, want it, capacity to do it).
- Commission a formal third-party executive compensation study for your industry and geographic region to establish defensible market-rate salaries for any seats that truly require replacement hires.
- Document the exact transition timeline. If an Integrator or operations leader has taken over day-to-day execution, show historical payroll demonstrating that the business ran smoothly without owner intervention.
- Separate passive owner profits from actual labor compensation. Classify owner perks, personal vehicle leases, and non-operational travel as clear one-time add-backs supported by general ledger details.

When your Accountability Chart proves that a competent leadership team runs daily operations, the buyer has no basis to load your EBITDA with hypothetical replacement salaries.