Business Valuation and Reasonable Compensation
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The Relationship Between Business Valuation and Reasonable Compensation
- September 1, 2014
- Posted by: RCR Admin Team
- Category: Archived
By Jack Salewski, CPA, CGMA & Paul S. Hamann
A common question in public practice is, “how much is my business worth?” This question comes up for a variety of reasons. It could be a business merger, sale of the business, divorce, death or even idle curiosity.
There are a lot of different factors that go into a business valuation. It is an oversimplification, but most businesses are valued as a multiplier of earnings before interest, taxes, depreciation, and amortization (EBITDA).
When more wages are taken out than what is reasonable, the value of the business will be understated. This will cause the company and the shareholders to pay more in payroll taxes than they should. If fewer wages are paid out than what is reasonable, then the company value will be overstated.
