Glossary · Normalisation

Owner-compensation normalisation

Owner-compensation normalisation replaces the actual owner salary with a market-rate management salary — typically the first and largest normalisation on Benelux SME EBITDA.

Definition

Many SME owners deliberately draw a tax-optimised — often low — salary. Others draw a high salary to avoid dividend tax. For M&A neither tells you anything useful: a buyer wants to know what it costs to run this business with a hired manager.

Normalisation replaces the actual salary with a market-rate management salary based on the role (operational director, hands-on owner, part-time figurehead), the scale (€2m revenue vs €15m revenue) and the Benelux salary benchmark. The delta — positive or negative — applies as a correction on reported EBITDA, producing normalised EBITDA which becomes the multiple basis.

Formula

Normalised EBITDA = Reported EBITDA + (Actual owner salary − Market-rate management salary)

Worked example

An Antwerp manufacturer reports €450k EBITDA. The owner draws €40k (tax-optimised) while a hired COO for this role would cost €110k. Correction = 40 − 110 = −€70k. Normalised EBITDA = 450 − 70 = €380k. A 4.0x sector multiple on the raw figure suggested €1.8m; on the normalised figure only €1.52m.

When it matters

Mandatory for every sale-grade valuation from €1m revenue upwards. Negotiators who skip this step get caught in DD — buyers almost always run the market-rate correction themselves and demand a price adjustment. Do it transparently up front.

Read: how Upswitch normalises automatically

Frequently asked

What other normalisations exist beyond owner compensation?: Non-recurring items (one-off legal, relocation), intercompany flows, personal use of business assets, and discretionary expenses. Owner compensation is usually the largest, but never the only one.
How do I determine a market-rate management salary?: Use Hudson or Korn-Ferry Benelux salary surveys, corrected for sector, scale (revenue + headcount) and role content. Upswitch includes a built-in benchmark.
Should I normalise owner compensation if I use SDE instead of EBITDA?: No — SDE explicitly adds full owner compensation back to EBITDA, then uses SDE-specific multiples (1.5x–3.5x). It is an either/or choice.
What's the biggest pitfall?: Asymmetric normalisation: only applying "positive" corrections (salary up) and ignoring negative ones (salary down). Buyers spot this immediately and you lose credibility.

Related terms

EBITDA— EBITDA is earnings before interest, taxes, depreciation, and amortization — the cash-flow proxy on…
SDE (Seller's Discretionary Earnings)— SDE is EBITDA plus full owner compensation plus discretionary expenses — the standard metric…

Paired valuation method

/en/waarderingsmethodes/ebitda-multiple

Definition

Worked example

Frequently asked

What other normalisations exist beyond owner compensation?

Non-recurring items (one-off legal, relocation), intercompany flows, personal use of business assets, and discretionary expenses. Owner compensation is usually the largest, but never the only one.

How do I determine a market-rate management salary?

Use Hudson or Korn-Ferry Benelux salary surveys, corrected for sector, scale (revenue + headcount) and role content. Upswitch includes a built-in benchmark.

Should I normalise owner compensation if I use SDE instead of EBITDA?

No — SDE explicitly adds full owner compensation back to EBITDA, then uses SDE-specific multiples (1.5x–3.5x). It is an either/or choice.

What's the biggest pitfall?

Asymmetric normalisation: only applying "positive" corrections (salary up) and ignoring negative ones (salary down). Buyers spot this immediately and you lose credibility.