What You Need to Know About Income Statement Normalization Adjustments
When it comes to the value of your business, “Normalization” of income is a first step in the determination of an accurate valuation, taking into account fluctuations in revenue, expenses, gross profits, and industry trends.
Normalization adjustments are essential to adjust non-recurring items and to reflect normalized levels of revenues and expenses that are expected to prevail in the future.
How is a Normalization Performed?
A Chartered Business Valuator determines normalized values by taking a comprehensive look at your business and making notional adjustments to your financial statements. For example, adjustments would be made for non-economic remuneration, non-recurring expenses, and benefits paid on the owner’s behalf that would not be incurred by a buyer. Once the adjustments are made, the result is a “normalized” income level.
Some common examples of three types of normalization adjustments include the following:
- Salaries paid to non-working family members (i.e., for the purposes of income splitting)
- Non-market compensation and bonuses for management (i.e., owners taking home more in salary than the industry standard, or granting themselves bonuses that are considered above market)
- One-time costs that artificially skew the bottom line in the financial statements
- Legal fees or settlements that the company has had to pay out
- One-time costs associated with expansion or relocation of their facilities
- Costs associated with a non-recurring restructuring of the business
Benefits Paid on the Owner’s Behalf
- The free or discounted use of facilities or real estate that is independently owned by the business owner
- Personal items expensed by the business on the owners’ behalf (e.g., meals, vacation, etc.)
Who Can Perform an Income Statement Normalization Adjustment?
Normalization is an important part the valuation of a business. Experienced experts such as the Fuller Landau Toronto Business Valuations team will be able to take all the variables into consideration. To learn more, contact us today to schedule a meeting.