Normalization – Business Broker Terms

Key Aspects of Normalization: Adjusting for Non-Recurring Items: These are expenses or revenues that are unusual and not expected to occur regularly, such as legal settlements, one-time sales, or extraordinary losses. Owner's Compensation Adjustments: Normalizing owner compensation to market rates, especially if the owner is overpaid or underpaid compared to industry standards. Personal Expenses: Removing personal expenses run through the business that are not related to business operations, such as personal travel or entertainment costs. Non-Operating Expenses and Income: Excluding income and expenses from activities that are not part of the core business operations, such as investment income or unrelated rental income. Related-Party Transactions: Adjusting for transactions with related parties that may not be conducted at market rates, such as rent paid to a property owned by the business owner. Capital Expenditures: Accounting for necessary capital expenditures that are essential for the business's ongoing operations, which may not be fully reflected in the current financial statements. One-Time Costs Associated with the Sale: Removing or adjusting costs that are incurred as part of the process of preparing the business for sale, which will not be ongoing post-sale. Purpose of Normalization: The primary purpose of normalization is to present a realistic and standardized view of the business's financial performance. This allows potential buyers, investors, and valuers to make more accurate comparisons and assessments. Normalized financial statements help in determining the true earning potential of the business, which is critical for valuation purposes and in negotiating fair terms during a sale or acquisition.