Tax documents can shed light on a myriad of questions we may have. Tax returns allow us to identify a company's corporate structure, owner's compensation, and ownership percentage.
When conducting a business valuation, seller's discretionary income ("SDI") is an important metric to understand. Calculating SDI is straightforward by simply adding an owner's salary plus adjusted earnings ("EBITDA").
Privately held businesses can elect to pay partners any amount they choose to. This results in partners' salaries being below or above a normal market rate. This can skew the true earnings of a company in either direction.
Analysts make an informed decision (through data and professional experience) to solve this issue.
Read more about owner's compensation and its impact on value here.