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Do you always add in owner salary to determine Owner Benefits

Working on determining the EBIDTA it is suggested that you also add in the owner's salary as another owner benefit (just like the owners car payments, vacation trip, cell phone, etc.) to come up with the true cash flow number. But that does not make sense if the owner is a worker and would have to be replaced with another worker. So wouldn't it hold true that the only salary that is added back in would be the excess salary the owner received over and above what he would have to pay someone else to do the same job?

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Answers (1)
William Bruce, ABI
William Bruce Business Sales & Acquisiti
Baldwin County, AL
Premium Broker

There is a difference between discretionary cash flow and EBITDA. For small to medium size businesses, one owner's salary is added back to compute discretionary cash flow (owner's benefit).

For the larger companies, when computing EBITDA, the market value of a hired manager of the business is not added back. The essential difference is that small to medium size businesses are assumed to be owner operated.

William Bruce, President
American Business Brokers Association

Sep 27, 2013

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