Market wage

Definition

What the open market pays someone to do the job the owner does today.

Why It Matters

Every earnings figure a seller quotes assumes somebody runs the place, and when that somebody is the seller working sixty hours for nothing, the number is not repeatable. Subtracting a market wage for the role is what turns SDE into EBITDA, and a lender tests coverage only after whoever runs the place is paid. An SBA lender may adjust owner pay, but the adjusted pay must cover the buyer's obligations and living expenses and pass a global cash flow test at 1 to 1. Look the number up by occupation instead of guessing it: a seller's own draw is evidence of what they chose to take, not of what the job costs to fill.

In numbers: A seller shows $700,000 of SDE and works in the business full time. Pay the replacement $120,000 and the earnings a lender underwrites are $580,000, which is a 17% haircut before a single add-back is argued.