The financial statements of a business rarely tell the full story. Reported earnings often include personal benefits, one-off items or structural decisions that make sense for the current owner but distort the true, sustainable profit of the business.
This is why normalisation adjustments are so important. By adjusting the historical earnings to reflect the underlying, sustainable, ongoing profitability of a business, they help establish the true maintainable earnings which is the number that ultimately drives valuation.
Why Normalisations Matter
Business owners often operate their businesses in ways that suit their personal circumstances but can significantly distort the profitability of the business. Personal expenses, over/under owner remuneration, one-off or abnormal costs, non-market property rent or strategic decisions suited to the owner’s situation may all suppress or inflate the earnings that buyers will use to value the business.
Proper normalisation provides a clearer view of the genuine maintainable earnings and positions the business for the strongest possible sale outcome for all parties.
When normalisation adjustments are done thoroughly and transparently, both buyer and seller benefit. The seller demonstrates the true value of the business and the buyer gains confidence in the sustainability of earnings.
Common Types of Normalisation Adjustments
When preparing a business for market, DMA reviews the financial statements in detail to identify adjustments across a number of areas. Common examples include:
Owner-Related Items
- Working and non-working owners’ remuneration (adjusted to market rates)
- Owners’ personal expenses (vehicles, travel, etc.)
- Salaries, superannuation or consulting fees paid to family members not working in the business
Non-Recurring or Non-Commercial Items
- One-off legal or accounting fees
- Unusual or abnormal bad debt write-offs
- Transaction costs associated with the sale
- Spending with no commercial benefit (Sponsorship, donations, discretionary expenses)
Accounting or Non-Operating Adjustments
- Depreciation and amortisation (to be replaced with capital replacement provision if using EBIT)
- Building write-offs
- Finance costs, interest, dividends
- Gains or losses from the sale of non-operating asset
Property and Leasing Adjustments
- Market rent corrections where property is owned by the vendor
- Internal rent or intercompany income
- Lease payments requiring reclassification or capitalisation review
Other Operational Adjustments
- Bank guarantee charges
- Borrowing expenses
- Hire purchase charges
Each adjustment contributes to a more accurate reflection of the business’s earning capability under new ownership.
How Adjustments Influence Valuation
Small adjustments can have a large impact on enterprise value.
For example, on a 4x EBITDA multiple every $100,000 of normalisation adjustment affects the enterprise value by $400,000.
If reported EBITDA is $2 million but normalised EBITDA is actually $2.5 million, the business may be worth $2 million more than initially expected. These differences can materially affect both buyer and seller outcomes.
DMA’s Approach to Normalisation Adjustments
At DMA, we recognise that the normalisation of the financial statements is critical to achieving optimal transaction outcomes.
Our approach involves a comprehensive review of financial statements well before a business goes to market, identifying and documenting every adjustment with a complete audit trail.
This rigorous preparation ensures that when we present a business to potential buyers the normalised earnings position is defensible, transparent, and credible. By proactively addressing normalisation before due diligence begins we eliminate surprises, reduce negotiation friction and position our clients to capture the full value their business deserves.
