One of the most overlooked factors when valuing a business is how the owner pays themselves. Many small business owners either underpay or overpay themselves for tax purposes, lifestyle reasons, or simply because they never thought about it. But when it comes time to sell, this detail matters more than you think.
A recent Forbes article explained it clearly: buyers will adjust your financials to reflect a market-rate salary for the role you perform.
Why This Matters in Valuation
When buyers look at your business, they want to understand its true profitability—not just what you take home. If you’re paying yourself:
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Too little: Your profits may look artificially inflated, which buyers will discount.
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Too much: Your profits may look smaller than they really are, which understates the business’s potential.
Either way, buyers normalize the numbers by plugging in what it would cost to hire someone in the market to replace you. This ensures they’re evaluating the business on its actual earning power, not on how you’ve structured your paycheck.
An Example
Let’s say you own a service business that shows $300,000 in net income. But you only pay yourself $30,000 a year when the going rate for someone in your role is closer to $100,000. A buyer will adjust your financials by subtracting that extra $70,000 to reflect reality. The “true” profitability, from the buyer’s perspective, is closer to $230,000.
Now flip it: if you’ve been paying yourself $200,000 when the market rate is $100,000, buyers will add $100,000 back to the business’s earnings. That makes your business look stronger and more valuable than your tax return suggests.
The Takeaway for Owners
If you want an accurate valuation and to avoid surprises later in the sale process, it pays to:
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Pay yourself a reasonable market salary in the years leading up to a sale.
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Be prepared to show buyers a clear explanation of how your compensation works.
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Understand that buyers aren’t judging your lifestyle—they’re adjusting for risk and reality.
When it comes to selling, your business isn’t valued on what you took out of it—it’s valued on what it can reliably earn under new ownership.
If you’d like to know how your compensation structure affects your business’s value, or how buyers will adjust your numbers, I’d be happy to walk you through it. Visit YourFloridaBusinessBroker.com to schedule a confidential consultation.
Michael Shea represents the Tampa Florida Transworld office. In business since 2005, he has established a reputation as a trusted business broker across Florida’s key markets- from Tampa to Orlando, Melbourne, and more. Over the past two decades, Michael and his team have closed over $1 Billion in sold business volume and presided over more than 450 transactions. His credentials include the IBBA Certified Business Intermediary®, and most recently, the prestigious Certified Exit Planning Advisor® (CEPA) credential.