Brokers/Sellers recasting payroll taxes as owner's salary?

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August 31, 2024

by a searcher from Instituto Tecnológico de Santo Domingo in Orlando, FL, USA

Seeing more business brokers recasting payroll taxes for the owner's salary. But why? This only works if the buyer doesn’t pay that salary to anyone—which is rare. Whether it's the buyer or a GM, the payroll expense stays. What am I missing?

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commentor profile
Reply by a searcher
from Duke University in Tulsa, OK, USA
That is typical if they are presenting the business to you on a SDE basis. This is because the salary an owner-operator pays themselves is subjective.

It does get confusing because many people use SDE and EBITDA interchangeably but they are not. You don't want to pay an EBITDA multiple on SDE.

I would encourage you to thoroughly research and understand the differences between the two (EBITDA and SDE) and know what should and should not be included for each. For instance some brokers add back employee payroll taxes when calculating EBITDA calling it a tax but EBITDA should only be income taxes.
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Reply by a searcher
from Stanford University in Healdsburg, CA 95448, USA
I don't think you're missing anything, actually. Adjusting the payroll tax for non-continuing executive-owner type's compensation makes sense, but if the buyer is replacing that function with another employee there should be an allocation of an additional position/payroll/attendant tax in the buyer's analysis. It's fair for the seller to back it out but also fair for the buyer to push back with a market rate compensation for some staff to replace the legitimate functions of the discontinued role.
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