Normalization of income

“Normalizing Adjustments” are essential to value a Company and to make meaningful comparisons between a Company’s past and future performances. The normalization of the financial statements should reflect a willing buyer’s expectations for operating results and assist in
determining the appropriate future cash flow stream. In
order to minimize confusion and disagreements between
Buyer and Seller, adjustments should be:
• Supported by detailed explanations and authoritative
references.
• Reflective of all relevant factors.
• Reasonable and necessary.
Normalization generally involves adjusting for a number
of broad categories:
• Unusual, Nonrecurring or Extraordinary Items: highly
abnormal; non-recurring in the foreseeable future;
or unusual in nature and infrequent occurrence.
• Nonoperating Items: assets, liabilities, related
earnings and expenses not associated with true
operating performance.
• Unusual Accounting Conventions: nonconformance
with GAAP; industries with unique accounting
habits; and changes in accounting methods.
• Appropriateness of ownership controlled expenses:
compensation, perks and family member expenses.
The appropriate adjustments to normalize income require substantial effort on the part
of your M&A professional. It is the cornerstone upon which the Seller and Buyer make
their determination of a sale/purchase price.

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