You built your business. You run it. You pay yourself from it. That all makes sense.
But here is the problem. When a buyer looks at your books, they see one blended number. Your pay and your profit sit on top of each other — and that makes the business look less profitable than it really is.
The result? A lower offer. Sometimes, a significantly lower offer.
This is fixable. You do not need a specialist accountant. You need a clear method and a clean presentation. This article gives you both.
Why Buyers Care About Owner Pay
A buyer is not purchasing your job. They are purchasing a profit-generating asset.
When buyers assess value, they ask one question:
What would this business earn if a competent manager ran it instead of the owner?
That question leads directly to your pay. If you earn $300,000 per year but a hired manager would cost $90,000, then $210,000 of your draw is business profit presented as salary.
Buyers and brokers call this a normalisation adjustment, or an add-back. Done correctly, those add-backs flow directly into your valuation. At a 3x earnings multiple, that $210,000 adjustment is worth $630,000 more at the negotiating table.
That is what is at stake. Here is how to approach it.
The Market-Rate Salary Test
Start here. Everything else depends on this number.
Ask yourself: If I left tomorrow, what would we pay someone to perform my role?
This is not what you would like to earn. It is what the market actually pays for the responsibilities and hours you contribute. Use job boards, industry salary surveys, or speak to a recruiter. Be honest about the scope of the role.
The figure you reach is your market-rate salary. Write it down. This is the only portion of your draw that a buyer will treat as a genuine business cost.
Everything you draw above that figure is a discretionary owner benefit — and that is where your hidden profit lives.
Above-Market and Below-Market Pay Adjustments
Most owners fall into one of two situations.
You pay yourself above market rate
If you draw $300,000 and the market rate for your role is $90,000, you are paying yourself $210,000 above market. A buyer will add that $210,000 back to profit. This increases the earnings figure they use to calculate value; and increases what they will pay for your business.
You pay yourself below market rate
Some owners take a modest salary to show a stronger net profit. That strategy can backfire. A buyer will factor in a market-rate salary as a cost before they value the business. If you take $40,000 but the role is worth $90,000, the buyer will reduce normalised earnings by $50,000. Plan for this in advance.
Neither situation is a problem. Both are manageable once you understand them and present them clearly.
Discretionary Expenses
Beyond salary, most owner-operated businesses carry personal expenses that run through the company. These are legal. They are common. And they reduce reported profit in ways that do not reflect the true earning capacity of the business.
Common examples include:
- Personal vehicle costs charged to the business
- Mobile phone plans for family members
- Meals and entertainment that are personal in nature
- Travel that combines business with personal holidays
- Life insurance and personal health cover
- Salary paid to a family member for minimal or informal work
- Home office costs that exceed genuine business use
List every one of these items. Add them up. Then add them back to profit. A new owner would not incur these costs — which is exactly why buyers accept them as legitimate adjustments.
Be conservative and be accurate. Buyers verify these figures. Overstating them damages your credibility and can end a deal.
A Worked Dollar Example
Here is how this looks in practice.
Sarah owns a regional property management business. Her tax return shows net profit of $180,000. She expects her business is worth around $540,000 at a 3x multiple. She is wrong; and pleasantly surprised when she works through the numbers properly.
Sarah’s Normalisation Calculation
| Item | Amount |
| Reported net profit (from tax return) | $180,000 |
| Add back: salary above market rate | + $160,000 |
| Add back: personal vehicle (full year) | + $18,000 |
| Add back: personal travel (family holiday) | + $8,500 |
| Add back: son’s wage (part-time, informal) | + $22,000 |
| Add back: one-off legal cost (lease dispute) | + $12,000 |
| Normalised Seller Discretionary Earnings | $400,500 |
| Value | |
| Reported valuation (3x net profit) | $540,000 |
| Normalised valuation (3x SDE) | $1,200,000 |
| Value uplift | +$660,000 |
Sarah’s business was not worth $540,000. It was worth over $1.2 million. The difference was not luck. It was an honest list of add-backs and a clear, well-structured presentation.
How to Present This in an Information Memorandum
An information memorandum (IM) is the document you provide to prospective buyers. It tells your business story, presents your financials, and must explain your normalisation clearly and credibly.
Structure the earnings section this way:
- Start with your audited or tax-reported net profit
- List each add-back on a separate line with a brief description
- Show the dollar amount for each item
- Total the add-backs
- State the final Seller Discretionary Earnings (SDE) figure clearly
- Apply the relevant multiple to derive the indicative value
Support each add-back with documentation. Bank statements, invoices, and payroll records all help. Buyers trust what they can verify. Unsupported claims create doubt and slow down due diligence.
Use three years of data where possible. One strong year is a result. Three strong years is a track record.
Action Steps You Can Start This Week
You do not need to wait until you list to improve your position. These steps are practical, low-cost, and high-impact.
Step 1: Benchmark your salary this week. Search two or three job boards. Find three comparable roles in your industry and region. Calculate the median salary. That is your market-rate figure.
Step 2: Pull three years of accounts. Ask your accountant for profit and loss statements for the last three financial years. Identify personal and one-off expenses in each year.
Step 3: Build a normalisation table. Use a simple spreadsheet. One row per add-back. One column per financial year. Total at the bottom. Keep it clean and consistent.
Step 4: Separate personal expenses now. If you plan to sell within the next two years, move personal expenses off the business accounts. Cleaner records are easier to present and easier to sell.
Step 5: Document your role formally. Write a clear position description for your role as owner-operator. It supports your market-rate salary claim and helps buyers understand what the transition would involve.
Step 6: Engage a broker or advisor early. A good business broker reviews your normalisation before you go to market. They identify errors and strengthen your presentation before buyers see it.
Frequently Asked Questions
What is Seller Discretionary Earnings and why does it matter? Seller Discretionary Earnings (SDE) is the total financial benefit a working owner receives from the business each year. It combines net profit, owner salary, and legitimate personal expenses run through the business. Buyers use SDE to compare businesses on equal terms. It is also the figure they multiply to calculate value. A higher SDE produces a higher offer — which is why calculating it accurately matters so much.
How do I find the right market-rate salary for my role? Start with Australian job boards such as Seek, LinkedIn, or Indeed. Search for general manager, operations manager, or the title that best reflects your day-to-day responsibilities. Review three to five comparable roles in your industry and region, and note the midpoint of the salary range; not the top. Your accountant or a business broker can also provide sector-specific benchmarks. The goal is a figure that is defensible and reasonable.
Will buyers challenge my add-backs during due diligence? Yes, and that is completely normal. Buyers and their accountants will review every add-back. They will request supporting documentation including invoices, bank records, and payroll summaries. This is not a problem if your figures are honest and backed by evidence. Sellers face difficulty when they include inflated or unsupported add-backs. Present only what you can prove. A clean, conservative normalisation builds buyer confidence and accelerates the transaction timeline.
How many years of earnings should I normalise? Three years is the standard. Most buyers and brokers review a weighted or simple average across three full financial years. The most recent year carries the most weight, but historical consistency matters. If one year was unusually strong or weak due to a one-off event, explain it clearly in your information memorandum.
What if I have been underpaying myself? Does it hurt my valuation? It can, but only if you do not account for it in your normalisation. When you have paid yourself below market rate, a buyer will deduct the shortfall from your profit figure; because they would need to pay a replacement the full market-rate salary. The solution is to include this as a separate line in your normalisation table: Market-rate salary adjustment — $XX,000. Your broker can help you frame this clearly so it does not create confusion for buyers.
Share Your Experience
Have you worked through this process in your own business?
Share what worked, what surprised you, or what you are still working through. Your experience helps other owners in the same position. Leave a comment below or reach out directly — every question deserves an answer.
You Are Closer Than You Think
The gap between what your business appears to be worth and what it is actually worth often comes down to one thing: how clearly you separate your pay from your profit.
Get this right, and your valuation reflects the real performance of the business you have spent years building.
Disclaimer
This article provides general information for small business owners. It is not financial, tax, legal, or professional advice of any kind.
Before making any decisions about the value, sale, or structure of your business, always engage a qualified professional — such as a registered accountant, tax adviser, financial planner, business broker, or solicitor — who can properly assess your individual situation.
© 2026 bizblu.com. All rights reserved.
You are welcome to share or republish this article provided you give clear credit to bizblu.com and include a link back to the original. Republishing without attribution is not permitted.
se-0020
