Go-forward compensation
Factual definition
Go-forward compensation is the normalized continuing cost of the functions a business needs after a transaction. An owner-compensation adjustment must account for required ongoing work and any replacement or retained personnel costs on a consistent basis.
Replacing owner pay with the cost of required work
Hypothetical annual amounts in US$ millions: remove 0.42 of recorded owner compensation and include 0.31 of fully loaded replacement compensation for the same required duties. The net earnings adjustment is 0.11, assuming consistent periods and cost coverage and no duplicate adjustment.
This does not establish any actual owner’s salary.
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| Adjustment | Amount |
|---|---|
| Remove recorded owner compensation | +0.42 |
| Include fully loaded replacement cost | −0.31 |
| Net earnings uplift | 0.42 − 0.31 = 0.11 |
Check what the replacement cost covers
The US$0.31m replacement figure is useful only if it covers the work that will continue. Compare the owner’s actual responsibilities and hours with the proposed replacement role, including benefits and other employer costs on the same basis.
If the owner also manages a customer account that the replacement will not cover, identify who will perform that work and its continuing cost. Do not count the missing function as a saving merely because the owner leaves.
IBBA’s replacement-salary discussion recommends examining duties, industry, location and full-time or part-time requirements alongside market compensation evidence. Keep that evidence with the adjustment so a reviewer can reproduce the US$0.11m calculation and test the cost assumption.
Translate the supported adjustment into the bid
Apply a hypothetical unchanged 5× EBITDA multiple to the supported US$0.11m annual adjustment above. The implied enterprise-value difference is US$0.55m; applying the same multiple to all US$0.42m of owner pay would instead add US$2.10m and ignore the continuing replacement cost.
The US$1.55m difference between those calculations comes from capitalizing the US$0.31m cost that the business still needs to bear. This is a sensitivity under an assumed multiple, not proof that a buyer will pay either amount.
Where Go-forward compensation fits
Explore this term in the glossary cloud →