Proprietary Deal With Messy Financials

January 19, 2026

by a searcher from University of Virginia-Darden - Darden School of Business in Charlottesville, VA, USA

All, I've looked at several proprietary deals, and I'm running into the problem of messy financials. Specifically, I'm looking at how to handle financials where there isn't a salary/compensation line for the owner/operator. In one case, there was a net income or retained earnings line, but it was too low to be called the compensation the owners were getting. It is possible their compensation was included in the labor line, but that was still questionable. I know I'll really need to crack into the add backs, but before getting to that level of diligence, I'd love to hear examples of how others have handled that.

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Reply by an intermediary
from Brigham Young University in Woodstock, Georgia, United States

I’d start with tax returns as an anchor, especially for S-corps and multi-member LLCs. They won’t perfectly show true owner benefit, but they often reveal profit allocation, wages/guaranteed payments, and sometimes distributions. If the owner isn’t shown separately on the P&L, they’re commonly buried in labor/contract labor or mixed into discretionary expenses. LLC taxed as a partnership (Form 1065 + K-1): A) K-1 Box 1: ordinary business income, this is the owner’s share of profit (taxable) B) K-1 Box 4: guaranteed payments, common when one partner “works the business” (taxable) C) Distributions: cash taken out, often shown in the partner capital roll forward (sometimes on the K-1, sometimes in an attached statement) Distributions aren’t necessarily taxable income, they’re a balance sheet movement. Owners can show income without pulling cash, and they can pull cash even when profit is low (debt-funded distributions). A quick starting point is Box 1 + Box 4 for taxable owner earnings, then treat distributions separately as cash extraction. S-corp (Form 1120-S + K-1 + W-2): A) Owner W-2 wages: usually the cleanest “comp” number B) K-1 Box 1: ordinary business income/loss (taxable) C) K-1 Box 16 Code D: distributions (cash out, usually not taxable) You can cross-check distributions via Schedule M-2 / AAA. Watch for owners underpaying W-2 and overpaying distributions. Single-member LLC / Schedule C (Form 1040 Schedule C): You essentially just have Schedule C net profit as the “owner earnings” baseline. Draws/distributions don’t show cleanly, so you’re forced into identifying personal expenses embedded in operating lines (vehicle, meals, travel, phone, insurance, etc.), which is why this entity type tends to be the messiest.

Reply by a professional
from Columbia University in Fairfax, VA, USA

It's going to be tough to reverse engineer it from the P&L alone. The only reliable approach I've experienced is to ask the seller (or their CPA) to explicitly walk through how the owner was paid and then reconcile that with source documents (tax returns, W-2s, payroll, etc.). Otherwise, it's going to be tough to get to a reliable EBITDA / SDE number, because owner comp can be buried in all sorts of line items. I've seen it rolled into "Labor" or "G&A" with no breakout, partially run through distributions, masked by below market comp paired with discretionary expenses. I've even seen once where the owner was living off cash flow that never hit the P&L cleanly. As a very rough estimate, you could just model a conservative proxy for owner comp and treat anything above that as upside pending diligence.

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