A market-compliant DGA salary is the remuneration a director-major shareholder would receive for similar work at another company. In business valuation, the actual DGA salary is adjusted to a market level to show the true earning power of the company. This process, part of EBITDA normalisation, has a direct impact on enterprise value and is a crucial discussion point during mergers and acquisitions.
What is a market-compliant DGA salary and why is it crucial in business valuation?
A market-compliant DGA salary is the remuneration that an external manager would receive for performing the same work as the director-major shareholder. This salary is determined by market conditions, job requirements and company size, independent of what the DGA actually pays himself.
The difference between the actual salary paid and the market value arises because DMSs often make strategic choices about their remuneration. Some pay out minimal salaries for tax optimisation, while others pay themselves well above market levels. Both situations distort the picture of actual company performance.
In EBITDA calculations, the actual DGA salary is replaced by a market-based amount. This normalisation shows the real earning power of the company, regardless of owner choices. A DGA paying himself €50,000 annually, while an external manager would cost €150,000, creates a distorted positive EBITDA picture of €100,000.
This adjustment has a direct impact on enterprise value. Buyers calculate their bids based on normalised figures, assuming market-based post-acquisition management costs. Without correction, incorrect expectations and valuation differences arise during negotiations.
How do you determine what a market salary would be for a DGA position?
Market-based salaries are determined by systematic benchmarking against comparable positions in similar companies. This requires analysis of job scope, responsibilities and company characteristics to make an objective comparison.
Practical methods include using specialised salary databases, consulting HR consultants and comparing with public job profiles. Recruitment agencies often provide benchmark data for management positions, while industry associations sometimes publish salary surveys.
Crucial factors in the determination are:
- Company size, measured by turnover and number of employees
- Complexity of the organisation and geographical spread
- Sector-specific knowledge and experience required
- Responsibility for strategic decision-making
- Operational management tasks versus ownership
A DGA of a manufacturing company with €20 million turnover and 50 employees has different market salaries than a DGA of a consulting company with the same turnover but 10 employees. The complexity and required expertise help determine the market level.
What happens to the business valuation if the DGA salary is too low or too high?
Deviations from market-compliant DGA salaries lead to direct adjustments in EBITDA normalisation, affecting enterprise value. Salaries that are too low artificially increase EBITDA, while salaries that are too high suppress profits.
If the DGA salary is too low, the EBITDA is adjusted downwards. A DGA receiving €75,000, while €150,000 is in line with the market, results in an EBITDA adjustment of -€75,000. At a valuation multiple of 6x, this means a value reduction of €450,000.
Conversely, a DGA salary that is too high leads to an upward EBITDA correction. A DGA receiving €250,000, while €150,000 is in line with the market, generates an EBITDA improvement of €100,000. This can increase enterprise value by €600,000 at the same multiple.
During due diligence, buyers thoroughly investigate these normalisations. They validate the market conformity of management costs, as this determines their future operating expenses. Insufficiently substantiated adjustments lead to valuation discussions and possibly lower bids.
Typical adjustments during due diligence include recalculation of multiples, adjustment of cash flow projections and modification of risk estimates. Buyers often take conservative approaches when in doubt about salary adjustments, which can affect the final transaction value.
What documentation do buyers need to accept DGA salary standardisations?
Buyers require extensive documentation to validate and accept salary adjustments. This substantiation must be objective, comparable and verifiable to create confidence in standardisation.
Essential documents include a detailed job description of the DGA role, including time commitment to operational tasks versus ownership. Buyers want to understand which work is actually managerial in nature and which results from share ownership.
Market research is at the heart of the rationale:
- Benchmark data from similar positions in similar companies
- Salary surveys from reputable organisations
- References of recruitment agencies or HR consultants
- Comparison with public salary data of listed companies
External validation strengthens credibility. An independent HR consultant or corporate finance specialist can confirm market conformity. This external confirmation reduces discussions and speeds up acceptance by buyers.
Additional documentation includes historical salary trends, comparison with other management layers in the company and any external benchmarks previously performed. Transparency and completeness in the documentation determine acceptance by buyers.
As an entrepreneur, how do you best prepare for DGA salary discussions when selling?
Strategic preparation for DGA salary discussions begins years before a potential sale. Timely adjustment to market-based levels creates a defensible basis and avoids valuation discussions during the sale process.
Documenting work is the first step. Entrepreneurs should analyse their time allocation and distinguish between operational management tasks and ownership. A detailed task overview supports later salary adjustments.
Practical preparation steps include:
- Periodic benchmarking of own salary against market standards
- Gradual adjustment to market level over several years
- Documentation of job scope and responsibilities
- External validation by HR professionals or consultants
Creating a independent management team Reduces DGA dependency and supports salary adjustments. Buyers value companies where the DGA role is clearly defined and where alternatives to external replacement exist.
Professional guidance in sales preparation helps to optimise DGA salaries and anticipate buyer demands. Experienced advisers know market norms and can suggest realistic corrections that buyers accept.
A well-prepared entrepreneur has market-based salaries, documented job descriptions and external validation available. This preparation accelerates the sales process and maximises the enterprise value. For strategic guidance on these complex valuation issues, you can contact contact our specialists.
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