Compensation for owners constitutes a pivotal aspect addressed in various manners within a Confidential Information Memorandum (CIM). Several variables influence how owner compensation is treated in a CIM, including the owner’s salary, their current role in the business, and their intended role post-transaction. The integration of these variables determines the approach to addressing owner compensation in the CIM. It is essential to note that distributions do not impact adjustments to owner compensation since they do not affect the business’s income statement.

When an owner exits the business post-transaction, the adjustment for their compensation hinges on their salary and involvement in day-to-day operations. If the owner actively participates in the business, the salary adjustment aligns with the market rate for a comparable role. For instance, if the owner functions as the CEO, the adjustment reflects the prevailing industry rate for chief executives, typically obtained from sources like the Bureau of Labor Statistics. Any excess of the owner’s salary over the market rate is added to adjusted EBITDA, whereas any shortfall is subtracted. This adjustment logic accounts for the need to hire a replacement at or near the market rate once the owner departs.

When an owner is not actively engaged in the business, their entire salary can typically be added back. Since the owner does not fulfill a functional role in the industry, there is no requirement to hire a replacement, and the owner’s current compensation ceases upon departure.

In scenarios where an owner remains with the business post-transaction, their salary and role remain pivotal in the adjustment process. Compensation adjustment resembles the approach taken when the owner exits the industry, considering the market salary for the position the owner will assume post-sale. However, if the expected post-sale salary is significantly lower than the current one, adjustments can be adapted accordingly. If an owner solely receives compensation through distributions, the entire market salary is subtracted, as the owner’s salary will now need to be expensed by the company post-transaction.

Adjustments for owner compensation must be considered for all owners, with the handling of adjustments varying based on their roles, salaries, and post-transaction intentions. Once these adjustments are made, they provide a more accurate depiction of what the new owner can anticipate in terms of EBITDA, with the owner’s influence on earnings duly accounted for.

Tampa Business Broker Michael Shea is a 19 year veteran of M&A and Main Street Business Sales in Tampa Florida. He has assisted business owners of all sizes in Selling Their Businesses in Tampa. For a personal consult regarding the sale of your business contact him at 321-287-0349 or email at mike@tworld.com