Determining reasonable compensation for business owners can be tricky, and often you simply can’t find the data. What to do? In a recent interview, compensation consultant Mark Lipis (Lipis Consulting) gives some advice.
Good idea: “We try to find some data that is usable even if it's not perfect,” says Lipis. “We often try to come at it from several directions. For example, in one of the cases I'm involved with, we were able to find some data from a trade group.” While not perfect, it's better than nothing, he points out. “We were able to find some companies that were sort of in the same NAICS industry code that are publicly traded, so we looked at proxy data. And, because we needed to look at the compensation in context, we found some general manufacturing surveys put out by a trade association in Southern California, which has both a manufacturing cut of data and a private company cut of data. We performed three different analyses based on the best data we could find.”
The full interview with Lipis, who was the expert retained by the IRS to testify in the Aries case (Aries Communications Inc. v. Commissioner (2013 Tax Ct. Memo LEXIS 111)), appears in the January 2015 issue of Business Valuation Update (subscription required).