Owner's Salary and Its Impact on Business Valuation

18 September 2025

When running a business, determining how much to pay yourself as an owner can be tricky. Pay yourself too much, and you might reduce the company’s profitability. Pay yourself too little, and you could struggle with personal finances. But did you know that your salary can also have a significant impact on your business's valuation?

In this article, we’ll dive into how an owner’s salary affects business valuation, the different ways to structure owner compensation, and how potential buyers or investors view your salary decisions.

What is Business Valuation?

Before we get into the details, let’s cover the basics. Business valuation is the process of determining the economic value of a company. Whether you're selling your business, seeking investors, or planning for the future, understanding valuation is essential. Several factors influence a business’s value, including:

- Revenue and profitability
- Market conditions
- Assets and liabilities
- Industry trends
- Owner's salary

Yes, that’s right—your salary plays a role in how much your business is worth. Let’s look at why.

How Owner’s Salary Affects Business Valuation

1. Impact on Profitability

One of the main ways your salary affects valuation is through its impact on the company's net profit. Since most valuation methods rely heavily on profitability, the higher your salary, the lower the reported profits. This can make your business appear less valuable on paper.

For example, imagine two identical businesses generating $500,000 in annual revenue. If one owner pays themselves $150,000 while the other takes only $50,000, the second business will show higher profits. Potential buyers or investors might see the first business as less profitable, even if both owners are simply compensating themselves differently.

2. Adjustments in Valuation Methods

When valuing a business, analysts often make adjustments for owner-related expenses, including salary. This is called “owner’s discretionary earnings” (ODE) or “seller’s discretionary earnings” (SDE). Essentially, they add back an owner’s salary to calculate the true earnings potential of the business.

For instance, if an owner takes a high salary, valuation experts might adjust it to reflect a “market-based” salary—what someone in a similar role would typically earn. This ensures the business is valued fairly.

3. Attractiveness to Buyers

If you’re planning to sell your business, your salary could influence how appealing your business looks to buyers. An excessively high salary can scare buyers away because it suggests the business might not generate enough profit after new ownership expenses are factored in.

On the other hand, an unrealistically low salary might raise red flags. A buyer might wonder if you're artificially inflating profits by underpaying yourself. This could mean that, after the sale, the business might not be as profitable once a reasonable salary is put in place.

4. Tax and Legal Considerations

The way an owner is compensated can also have tax implications. Overpaying yourself could lead to unnecessary tax burdens, while underpaying could cause scrutiny from tax authorities. The IRS, for example, requires that salaries be "reasonable" based on industry standards.

For corporations, excessive salaries might not be tax-efficient, as they reduce taxable income. Conversely, owners of pass-through entities like LLCs or sole proprietorships might prefer to take distributions rather than a high salary to minimize self-employment taxes.

Best Practices for Structuring an Owner’s Salary

Finding the right balance when setting your salary is crucial. Here are some best practices to consider:

1. Pay Yourself a Market-Competitive Salary

Research industry salary benchmarks to ensure you're paying yourself fairly. This helps avoid valuation distortions and tax issues.

2. Separate Personal and Business Finances

Keeping business and personal finances separate helps ensure a clear and accurate picture of your company’s profitability and valuation.

3. Consider Bonuses and Distributions

Instead of taking all your income as salary, consider bonuses or profit distributions. This strategy can be tax-efficient while still reflecting fair compensation.

4. Keep Your Salary Flexible

Your business's financial health may change over time. Adjusting your salary based on performance ensures that you're balancing fair compensation with business growth.

5. Consult a Financial Expert

Accountants, financial advisors, or business valuation experts can help you strike the right balance when setting your compensation.

How to Present Owner’s Salary in Business Valuation

If you're preparing for a valuation, transparency is key. Ensure that financial records clearly reflect your salary and any discretionary expenses. When providing financial statements to buyers or investors, disclose any adjustments that have been made to normalize your earnings.

Many valuation experts use EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) as a standard metric. If your salary significantly impacts EBITDA, be prepared to explain why and provide context for any adjustments.

Final Thoughts

The owner’s salary is more than just a paycheck—it directly influences the perceived and actual value of your business. Whether you're planning to sell, attract investors, or simply maximize your company's worth, striking the right balance with your salary is crucial.

Pay yourself too much, and your business might seem less profitable. Pay yourself too little, and buyers might question sustainability. The key is to find a salary that fairly compensates you while keeping your business valuation strong.

If you're unsure whether your salary is set correctly, consulting with financial professionals can help ensure you're on the right track. At the end of the day, your goal should be to build a valuable, thriving business—without shortchanging yourself or your business’s future.