Owners compensation with 2 owners

In a situation with two owners who are both working full-time at the business and receiving ZERO salaries/wages, the entry into owner compensation would be negative and equal to the probable replacement cost of the second owner at market level. If the two owners are paid any benefits these dollars must also be included.

When evaluating owner compensation, the first questions are how many owners and are they working in the business on a f-t, p-t or fully absentee basis.

In every case, you begin by entering the ACTUAL TOTAL compensation (salary,payroll tax, perks) paid the PRIMARY owner-operator under the FMV assumption that the hypothetical buyer will be replacing the work effort of the primary owner and therefore have access to his or her compensation (whether it is zero or $10m).

If there is a second or third owner and/or family members, you must compare their ACTUAL compensation with what it will cost to REPLACE them at market level. If one is being paid $100K but it only will cost $50K to replace this second owner, then you must ADD the differential of $50K into the owner compensation line (and vice-versa, i.e. if ACTUAL is $100K but REPLACEMENT COST is $150K, you would SUBTRACT the differential. If the second owner or family members are fully passive (not working), then you would INCLUDE ALL of their compensation with the primary owner's compensation. If they are working part-time, the adjustment is still based on the difference between ACTUAL versus REPLACEMENT cost.

In no situations should you add "distributions" or "dividends" into the owner compensation line as these are coming out of pretax income, which is already reflected in the algorithm by the very first entry in Step 3.