S-Corp: Accounting for Owner's Draw (Distributions)

by a searcher from Harvard University - Harvard Business School

2 years ago

Hey Searchfunder community - wondering if anyone has come across this scenario before involving an owner's draw (distribution) in an S-Corp being treated as an EBITDA adjustment. 

Intermediary has presented an adjusted EBITDA figure accounting for this Owner's Draw as excess compensation, which in some years is quite significant, e.g. ~30% of adj. EBITDA. 

My understanding as I read the company's I/S and B/S (and as I did a little supplemental reading on the subject since I'm not an accountant), owner's draw or distribution in an S-Corp is essentially a reduction of the equity account, pulled out of retained earnings. It does not appear on, nor does it have an impact on, the Income Statement. Even so, this intermediary is treating it as an EBITDA adjustment. 

Is this adjustment BS and the owner is just pulling accumulated cash out of the company that has nothing to do with its in-year profitability, do my accounting skills still need more work, or is it somewhere in between?

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intermediary from State University of New York at Stony Brook

Sheila, your instincts are absolutely correct. A distribution made to the owner is a balance sheet entry and has no place on the income statement. That intermediary who made that adjustment needs to join the International Business Brokers Association or the M&A Source to get properly educated on how to do recasting.

2 years ago | like reply | 1 like

searcher from University of Southern California

I'm a searcher / CPA and I've noticed these adjustments are quite common in intermediary prepared presentations. If you need assistance with deal screening, feel free to send me an email: --@----.com

2 years ago | like reply | 0 likes

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