Map the owner’s actual jobs
List the roles performed by the owner, the time spent and which activities must continue after a transfer. Sales, technical delivery, operations and finance may be combined in one person. The replacement may be several part-time responsibilities rather than a single managing director.
Include unpaid family support and benefits provided outside ordinary salary. A valuation needs to understand the operating model, not simply the payroll line. Document what the owner intends to continue doing and distinguish a temporary handover from a permanent management arrangement.
Reconcile remuneration before adjusting it
Identify salary, employer costs, benefits and other relevant expenses in the accounts. Distributions to shareholders have a different accounting character from payroll and should not be casually treated as the same expense. Ask the adviser to reconcile the starting earnings measure.
Related-party rent, vehicles or services can also need investigation. Any adjustment should explain what expense the business would incur under the assumptions being valued. A private cost in the ledger and a genuine operating requirement are different questions even where the owner currently pays for both.
Worked example: the replacement-cost effect
Suppose hypothetical reported EBITDA is £160,000 after £90,000 of owner remuneration. If the continuing business needs a replacement package costing £75,000, the net remuneration adjustment is £15,000 and the resulting figure is £175,000 before other changes.
Adding back the entire £90,000 would produce £250,000 and omit the replacement role. Conversely, the analysis may need a negative adjustment where the owner is underpaid. These are illustrative calculations, not salary benchmarks or a valuation of a real business.
Avoid mixing owner-operator and managed-business measures
A buyer who intends to do the owner’s work may assess cash available to themselves differently from an investor buying a fully managed company. Seller’s discretionary earnings and EBITDA are not interchangeable labels. Explain which measure is being used and why.
If a comparison multiple was observed using a different earnings definition, applying it mechanically can distort the result. Check the denominator, transaction structure and business characteristics. A clear earnings bridge lets different users understand the distinction without implying that one measure suits every buyer.
Look beyond salary to transferability
Replacing time does not automatically replace relationships, authority or know-how. Identify customers who depend on the owner, undocumented processes and contracts requiring consent. These issues may affect the forecast and the feasibility of the replacement plan.
Show the transition costs and any overlap period separately from ongoing management costs. Hiring someone does not guarantee that customers stay. A valuation should distinguish an achievable operating assumption from an ambition to make the business less owner-dependent in future.
Test the replacement role against a normal week
Use a representative working week to check the proposed replacement. Include quoting, customer calls, supervision and tasks completed outside ordinary hours. Ask whether the planned employee or external provider has capacity and authority to do them. This can expose an unrealistically narrow job specification before it becomes an unsupported assumption in the valuation.
| Area | Evidence to examine | Question to resolve |
|---|---|---|
| Commercial work | Sales, renewals and customer escalation | Who owns the relationship after transfer? |
| Delivery work | Technical activity, review and problem solving | Is specialist capacity realistically available? |
| Management work | Approvals, staff supervision and planning | Does the replacement have authority as well as time? |
Prepare evidence for a useful valuation discussion
Bring a role summary, remuneration breakdown and explanation of the proposed future structure after scope and confidentiality are agreed. If replacement costs are uncertain, present alternative supportable scenarios rather than inventing a precise salary.
Consult EFC can discuss the valuation purpose and appropriate earnings analysis for your business. Start with the broad decision, ownership structure and timing. A valuation is not a promise of sale proceeds, and the assumptions should be revisited if the owner’s intended role or transaction terms change.
Your preparation checklist
- Describe the owner’s jobs and ongoing requirements.
- Reconcile remuneration and related-party costs to the accounts.
- Allow for a supported replacement operating model.
- Separate transition costs from continuing expenses.
Frequently asked questions
Can I add back all my salary?
Only where the chosen earnings measure and operating assumptions justify it. A managed business normally needs an allowance for work that must continue.
What if I work for a very low salary?
A normalisation may reduce reported earnings if the continuing role would cost more. The adjustment needs evidence and clear assumptions.
Will a buyer who does my job pay more?
Their assessment can differ, but price also depends on funding, risk and negotiations. Explain whether the analysis assumes an owner-operator or a managed business.
Sources and scope
This is general preparation guidance. Worked examples are original hypothetical illustrations, not client outcomes, market multiples or individual advice. Agree the purpose, evidence and scope before commissioning professional work.
Professional background: ICAEW business and share valuation resources and IVSC standards overview. These links provide context and do not imply endorsement, assurance or compliance for an individual engagement.
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