The short answer. Pay yourself the market rate for someone doing your job at your scale. Undermarking is not virtue. It inflates reported EBITDA by the underpayment. Every operating decision downstream is made against the wrong number. At sale, buyers restate to market and you leave that inflation on the table. In practice, most owner-operators of $1M to $10M businesses should be drawing between $135,000 and $250,000 depending on role, region, and business complexity.
How To Find Your Market Rate
Look at three data points. First, published salary surveys for the general manager, CEO, or executive of a business at your revenue tier and industry. BLS Occupational Employment Statistics, industry association surveys, and executive search firm reports all publish these.
Second, comparable job listings for the role you actually do. Not the owner title. The functional role. If you are the head of sales, look at head of sales listings for businesses your size. If you are the head of operations, look there.
Third, what a hire would cost. If you were to leave the business tomorrow and hire your replacement, what would the compensation package need to be to attract someone competent. That is your market rate.
The three data points usually converge within a $30,000 to $50,000 range. That range is your market rate. Take the midpoint.
Why Undermarking Is Not Virtue
A generation of small business coaches told owners to pay themselves last. That was a cash-flow tactic dressed up as a moral instruction. It works as a short-term tactic during a genuine cash crunch. It corrodes as a long-term strategy.
Undermarking creates three specific problems. First, reported EBITDA is overstated by the amount of the underpayment. Every decision made against that EBITDA (pricing, hiring, capital investment) is made against the wrong number. Second, retirement funding falls behind because the owner is not paying themselves enough to fund a retirement account at market-rate percentages. Third, at sale, buyers restate owner comp to market and the multiplier applies to the smaller EBITDA. The owner leaves the phantom profit on the table.
The auto shop field note is the pattern. Twelve years of $47,000 draw when market was $135,000. The exit value was quietly $300,000 to $400,000 less than the owner thought it was.
How To Restate Owner Comp
Identify your market rate as above.
Compare against current draw. If current is below market, the gap is the amount by which reported EBITDA is inflated.
Restate the pricing model to fund the market-rate draw. This usually requires a modest price increase across the recurring book. Not a dramatic one. Restated Owner Comp of $135,000 against a current draw of $47,000 in a $1.9M revenue business is roughly 4.6 percent of revenue. A 5-point price move on that book generally clears it.
Restate MMP. Owner Compensation is the fourth sub-layer. Raise the sub-layer by the restatement amount. Recompute Layer Cake bottom-up. Layer 5 Breakeven will move up by the restatement amount divided by Intended Gross Margin. If current sales still clear the restated breakeven, the business supports the market-rate draw.
Frequently Asked Questions
What if I cannot afford to pay myself market rate?
Then the pricing model does not support the actual cost of running the business. That is a business model problem, not a personal frugality problem. Fix the model. Do not fund the gap with your own uncompensated labor.
Does market rate include equity distributions?
No. Market rate is what an employee doing your job would earn as W2 or contractor income. Equity distributions and profit distributions are separate and represent return on ownership, not compensation for labor.
What if I want to reinvest the difference in the business?
Reinvest through pricing and retained earnings, not through undermarking your own compensation. The difference matters at sale because reinvestment through pricing produces higher EBITDA that a buyer will pay a multiple on. Reinvestment through undermarking produces phantom EBITDA that a buyer will restate away.
How often should I restate owner comp?
At least every three years. Market rates move. Your role in the business evolves. What was market three years ago is usually 8 to 15 percent below market today.