Business Valuation

CHAPTER 4Normalization Process

PYRAMID STEP 4 Consider appropriate normalization adjustments based on (1) financial statement trends and industry benchmarking and (2) valuation methodology.

As discussed in Chapter 3, quantitative analysis requires certain normalizing adjustments to compare the subject company’s core operations with its peer group. These normalizing adjustments include (1) removing extraordinary and nonrecurring items; (2) excluding nonoperating assets, liabilities, income, and expenses; and (3) making tax-to-GAAP adjustments when the subject company’s financials differ from the GAAP basis used by peers. Additional methods-based economic normalizing adjustments are applied later, during the valuation methods phase, as they depend on the level of value being derived and the method selected. For example, adjusting equipment to fair market value should not occur during the quantitative analysis, as it would distort comparability with industry peers that report assets at book carrying value. This type of adjustment is reserved for method-specific application.

Note: The normalization process is the fourth step of the Valuation Process Pyramid and should be performed in conjunction with the qualitative and quantitative analysis discussed in Chapters 2 and 3 as well as during the process of understanding and identifying the appropriate benefit stream and the application ...