A practical guide for SBA lenders to evaluate and normalize owner compensation in underwriting and valuations.

Why Normalize Owner Compensation?

• Owners often underpay themselves for tax reasons or overpay to reduce net income.
• SBA valuations must reflect the cost a buyer would incur to replace the owner’s role at market wages.
• Improper salary adjustments can distort free cash flow and overstate value.

Normalization Steps

• Identify the owner’s actual duties (executive, sales, operations, technical, etc.).
• Estimate a market-based salary for those duties using industry and geographic benchmarks.
• Replace the reported salary with a normalized one in the cash flow calculation.
• Adjust associated payroll taxes and benefits if necessary.

Red Flags

• Owner draws only $20K for full-time work.
• No salary recorded—compensation paid via distributions only.
• Spouse or family members on payroll with no clear business role.

Data Sources

• BLS.gov (Occupational Employment and Wage Statistics)
• Salary.com, Payscale, ZipRecruiter, Indeed, Glassdoor
• Industry associations and regional economic reports

SBA SOP Tip

Free cash flow used in underwriting and valuations must reflect the true economic cost to operate the business—not tax-minimized or owner-inflated compensation strategies.