Why it matters
Family members often work in small businesses, and they are rarely paid what a stranger would be paid for the same job. A spouse who keeps the books for nothing, a son running the warehouse on a modest wage, a sibling on the payroll who does very little: each one changes the profit figure you are asked to value.
Underpaid relatives make earnings look higher than they will be once you hire someone at market rates, or once the relative asks for a proper salary. Overpaid relatives, or relatives paid for no real work, have the opposite effect, and sellers often present that pay as an add-back. Both need restating before you apply a multiple. Because the multiple applies to annual earnings, a gap in pay moves the value by that gap multiplied by the multiple.
Here is a fictional example. Crumb and Kettle, a bakery, reports seller's discretionary earnings of £200,000. The owner's spouse, who has no stake in the business, manages the shop unpaid. In this example, hiring a manager would cost £30,000 a year, so earnings on a market footing are £170,000. At an illustrative multiple of 2.5, the value falls by £75,000.
Loupe's valuation tool adds back the salary and benefits of one full-time working owner only. Pay for a second working owner stays in costs. The part of a relative's pay that a new owner would not carry, such as pay for no real work or pay above the market rate, can go in as a discretionary cost, but only where you can evidence it. If a relative is unpaid or underpaid, reduce the profit you enter by the extra cost of paying that role properly. The guide on add-backs explains which adjustments usually hold up.
There are people risks too. Relatives may leave when the owner does, expect to keep their roles, or hold informal understandings about pay or a future stake. Paying anyone below statutory minimums may also create a compliance problem, depending on local rules and the person's status.
Add-backs are costs added back to reported profit to show what a business would earn under a new owner. They raise SDE and adjusted EBITDA, so each one needs evidence.
Seller's discretionary earnings (SDE)
Seller's discretionary earnings is the yearly financial benefit a business gives one full-time working owner, before financing costs, non-cash charges and one-off spending.
How to spot it
- The staff list includes people who share the owner's surname or home address.
- Payroll shows a role paid far below market, or someone working with no pay at all.
- The seller proposes adding back a relative's salary while also describing that relative as helping out.
- Pay for relatives rose or fell sharply in the year before the sale.
- A relative has a vague job title and no clear duties.
- Staff costs as a share of revenue are low compared with similar businesses.
Questions to ask the seller
- Which staff are related to you, or to each other?
- What does each relative do, how many hours do they work and what are they paid?
- Will they stay after the sale, and on what terms?
- Which roles would need filling if they left, and at what cost?
- Are you proposing add-backs for any relative's pay, and what evidence supports them?
- Has any relative been promised a share of the sale proceeds or a future stake?
Documents to request
- Payroll records for the last three years, with names, roles, hours and total pay
- Employment contracts or written terms for each relative
- The seller's schedule of add-backs, with evidence for each item
- Recruitment quotes or pay data for the roles that relatives fill
- Tax filings showing pay to relatives, to confirm it was declared