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 which…
SDE (Seller's Discretionary Earnings)- SDE is EBITDA plus full owner compensation plus discretionary expenses: the standard metric for…

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.