Our Quality of Earnings analysis shows our management team is paid slightly below market rates because they receive performance based distributions. The buyer wants to adjust our EBITDA downward to reflect normalized market salaries. How do we defend our lean operational compensation structure?

Question

Tyler Smith · Accepted Answer

Buy side QofE teams will always look for reasons to normalize compensation upward, which reduces your historical EBITDA and lowers your valuation. To defend your lean structure, you must show that your compensation plan is a permanent operational advantage, not a temporary discount.

First, present your historical employee retention rates. If your management team has stayed with you for years despite lower base salaries, it proves they value the culture, the performance based distributions, and the clear paths of ownership. This is not an underpaid team; it is an aligned team.

Second, link their compensation directly to your EOS operating system. Show the buyer how your quarterly bonus structures are tied directly to hitting company Rocks and departmental scorecard goals. This proves that your compensation model keeps overhead low during slower periods while driving high performance when the business is growing.

If the buyer still insists on a salary normalization adjustment, negotiate a corresponding increase in your target multiple to reflect your lower fixed cost risk profile. Alternatively, agree to a post closing adjustment where any increase in management salaries is offset by a reduction in their performance bonuses, keeping the total compensation expense flat and preserving your historical EBITDA calculations.