Behavioral Economics Commons^™

Distinguishing Owner Compensation From Profit In Closely Held Companies: In Search Of A Responsibility Premium, Michael Sack Elmaleh

Michael Sack Elmaleh

The application of the income method of valuation requires that owner compensation be distinguished from free cash flow. The “proper” parsing of compensation and free cash flow can be the largest point of contention in contested valuation disputes. The preferred method of parsing is the substitution method which says that the proper allocation should be based on the wage that would have to be paid to a non owner employee. In this article I argue that owner employees carry additional responsibilities that are not normally borne by non owner employees. These additional responsibilities require that a premium be paid the …