How to normalise a working owner's salary in a business valuation

The roles are priced, not the drawing

Owners of private businesses pay themselves in different ways. Some take a large salary, some take a small salary and the rest as dividends or trust distributions, and some take nothing through the payroll at all. Those choices are usually driven by tax and cash flow, not by the value of the work done. A valuation therefore sets the owner's actual drawings aside and asks a different question: if the owner stepped away tomorrow, what would it cost to employ people to do everything the owner currently does?

That cost, including superannuation, is the figure deducted from earnings. If the owner draws more than the replacement cost, earnings go up after the adjustment. If the owner draws less, or nothing, earnings go down. The adjustment follows the work, not the bank transfers.

This matters because the earnings figure feeds directly into an earnings-based valuation. An owner salary that is understated by $50,000 overstates maintainable earnings by the same amount, and that error is then magnified by whatever capitalisation is applied. For how this interacts with seller's discretionary earnings, see SDE and EBITDA, which explains why the two measures treat the owner differently.

What a valuer actually looks at

List the roles before pricing anything

The first step is a plain description of what the owner does in a normal week. A typical owner of a small business might combine general management, sales, estimating or quoting, operations supervision, a trade or professional role, and bookkeeping. Each of those is a separate role with a separate market rate. An owner who works 55 hours a week across three roles is not one manager on one salary.

The usual approach is to estimate the hours or the share of a full-time role that each activity takes, then price each role at its own rate. A bookkeeping function that takes one day a week is priced as a fifth of a bookkeeper's salary, not as a fifth of a general manager's salary.

Part-time and absent owners

Where the owner works part-time, only the hours actually worked are replaced. Where the owner does very little and an employed manager already runs the business, the manager's salary is already in the accounts, and the owner's drawing is typically added back in full. The test is always whether the cost would continue under a new owner, and at what level.

Family members on the payroll

The same logic applies to relatives. A spouse paid $30,000 a year who does no work in the business is a cost a buyer would not incur, so the wage and its super are added back. A son or daughter working full time for less than the market rate is the reverse: the shortfall is a real cost a buyer would face, so it is deducted. Relatives paid at a fair rate for genuine work need no adjustment.

Superannuation follows the wage

A replacement employee would be paid superannuation. The ATO states that the super guarantee is a minimum of 12% of ordinary time earnings from 1 July 2025, and an award or agreement can require more. The replacement cost should therefore include super, and any super already paid for the owner or relatives in the accounts should be taken into account so it is not counted twice.

Other on-costs, such as payroll tax and workers compensation premiums, can also follow a replacement wage depending on the state and the size of the payroll. Whether they apply is a fact-specific question for the business's accountant.

Evidence for the rate

The rate chosen for each role needs support. Two kinds of evidence are useful, and they answer different questions.

The Fair Work Ombudsman notes that pay guides do not apply where an enterprise agreement covers the employee, so check whether the business has one. Fair Work also provides past-year pay rates through its Pay and Conditions Tool, which helps where the valuation date is in the past. Keep a dated copy or screenshot of each job advertisement or recruiter note relied on.

Worked example

This example is hypothetical. The salaries are illustrative only and are not benchmarks for any role or industry.

A business reports EBITDA of $300,000. The owner works full time as general manager and also does the bookkeeping, about one day a week. The accounts show the owner's salary of $40,000 plus $4,800 super. The owner's spouse is paid $30,000 plus $3,600 super but does not work in the business. The owner's son works full time in operations on $50,000 plus $6,000 super; evidence shows the role costs $65,000 to fill.

Step 1: replacement cost of the owner's roles

Step 2: compare with what the accounts already include, and adjust

Step 3: normalised EBITDA

$300,000 reported EBITDA less the net adjustment of $77,280 gives normalised EBITDA of $222,720.

Checking each line: $138,880 less $44,800 is $94,080. $72,800 less $56,000 is $16,800. Then -$94,080 + $33,600 - $16,800 = -$77,280.

The example ignores payroll tax and workers compensation for simplicity. In a real valuation they would be considered where they apply.

Limitations

• The adjustment estimates a cost; it does not set a salary for anyone. Where the owner's role is unusual, such as a specialist clinician or a licensed professional who is hard to replace, market evidence can be thin and the range of reasonable rates wide.
• Some owners bring things a salary cannot buy, such as personal relationships with key customers. That is a risk question about how much of the business transfers, not a salary question, and it affects value separately from this adjustment.
• Award coverage and classification can be complex. If there is doubt about which award or classification applies, check with Fair Work or an employment adviser rather than guessing.
• The super guarantee rate and award rates change over time. Use the rates that applied for the period being normalised, and the current rates for the forward-looking cost.

The Oliver Group guide to EBITDA add-backs and normalisation covers the wider set of add-backs a valuer reviews alongside owner remuneration.

Next steps

1. Write down, honestly, what the owner and each family member on the payroll do in a normal week, with approximate hours.
2. For each role, find the relevant Fair Work pay guide or note that the role is award-free, then collect two or three current job advertisements or a recruiter's view on the market rate.
3. Ask your accountant for a schedule of all wages, super and other payments to the owner and relatives for each year being reviewed.
4. Enter the figures in the earnings normalisation worksheet to see how the adjustment changes your earnings.
5. Review the other adjustments in what counts as a non-recurring expense before settling on a final earnings figure.

General educational information, not financial, tax or legal advice. Worked examples are hypothetical and do not value a real business. A valuation depends on its purpose, the evidence and the agreed scope.