One of the most overlooked yet financially critical questions for business owners nearing an exit is: "How much should I pay myself?" The answer isn’t just about covering your living expenses—it plays a direct role in the value of your business, how it’s perceived by buyers, and what kind of salary you can reasonably expect after the sale.
Let’s unpack how salary decisions before and after selling your company can influence your financial future and the outcome of your exit.
Pre-Sale: Why Your Salary Impacts Business Valuation
When potential buyers evaluate your business, they often look at EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) as a baseline for valuation. The higher the EBITDA, the more valuable your business appears.
Here’s where your salary comes in: If you’re paying yourself a high salary, that’s coming out of profits and reducing EBITDA. While you might need that salary to support your lifestyle, it could make your business appear less profitable to buyers. Conversely, reducing your salary boosts EBITDA and can significantly improve your valuation.
Example:
If your EBITDA is $500,000 with a $300,000 salary, and you reduce your salary to $150,000, your EBITDA jumps to $650,000. If your business is valued at 5x EBITDA, that one change could increase your business’s sale price by $750,000.
Key Takeaway: Lowering your salary (reasonably and transparently) before a sale can enhance the valuation multiple and the total sale price.
Post-Sale: What Salary Can You Expect?
Your post-sale salary depends on several factors, particularly the structure of the deal and your continued involvement in the company.
Staying On (As An Operator Or Consultant)
Many acquisitions involve retaining the business owner for a transition period, ranging from a few months to several years. Your salary here will often be negotiated as part of the deal, and may reflect market rates rather than your previous owner-draw.
For instance, if your business is in the professional services space, and a buyer wants you to stay on as CEO for 2 years, you might negotiate a salary similar to what CEOs in your industry and company size earn—possibly more, depending on the earnout terms or performance-based bonuses.
Walking Away
If you're planning to walk away after the sale, you won't be drawing a salary—but your total compensation comes from the sale price itself. That’s all the more reason to think strategically about how your pre-sale salary impacts EBITDA and, ultimately, how much you can walk away with.
Balancing Act: Personal Needs Vs. Business Goals
Striking the right balance between your current income needs and your long-term exit strategy is delicate but crucial. Some guiding questions:
Are you optimizing for current lifestyle or long-term exit value?
Do you plan to stay on with the business post-sale?
What level of income do you need after the sale to maintain your lifestyle?
This isn’t just a financial calculation—it’s a personal decision, and one that should align with your overall vision for your life post-exit.
How Exit Stage Left Advisors Can Help
At Exit Stage Left Advisors, we specialize in helping business owners navigate these complex decisions well before the sale. From benchmarking fair market salaries to modeling how your compensation impacts valuation, we provide strategic advice so you can exit with clarity and confidence.
Conclusion
Your salary, before and after the sale of your business, is more than just a paycheck. It’s a lever that can significantly impact your company’s valuation and your personal wealth after the exit.
Whether you're 3 months or 3 years away from a sale, now is the time to consider how your salary strategy supports your long-term goals. Consult with experts, model different scenarios, and ensure your financial future is in good hands.
