Normalising business results often goes wrong by misidentifying one-off costs, failing to adjust DGA expenses to market levels and anticipating future savings. These errors undermine the credibility of EBITDA calculations and can negatively affect business valuation. Correct normalisation requires systematic documentation and realistic adjustments that are accepted by potential buyers.
What does normalising business results actually mean?
Normalising operating results means adjusting the income statement by filtering out costs or revenues that are not representative of normal operations. The aim is to show the actual earning power of the company for valuation purposes.
In business valuation, normalised EBITDA differs fundamentally from standard accounting reporting. Where auditors focus on historical accuracy according to accounting standards, normalisation focuses on creating a clean picture of structural profitability.
Typical normalisations include filtering out one-off reorganisation costs, adjusting non-market DGA remuneration and eliminating personal expenses through the company. These adjustments are essential because buyers want to know which recurring profit they can expect after acquisition.
The quality of normalisations directly determines the credibility of valuation models. Poorly substantiated adjustments lead to buyer distrust and can weaken negotiating positions during due diligence.
Why do entrepreneurs make mistakes in identifying one-off costs?
Entrepreneurs make mistakes with one-off costs because they are too optimistic about what is truly non-recurring, incorrectly label structural costs as one-offs and overlook hidden recurring elements in seemingly one-off expenses.
The most common mistake is to normalise costs that recur regularly. Maintenance costs, IT replacements or periodic marketing investments are not one-off items, even if they vary from year to year. Buyers immediately recognise these patterns in historical figures.
In addition, owners underestimate the complexity of reorganisation costs. A one-off severance payment seems normalisable, but when it is accompanied by structural efficiencies, discussion arises about the sustainability of the new cost level.
Hidden one-off expenses pose the opposite problem. Costs for legal disputes, fines or remedial work are sometimes not recognised as normalisable items, underestimating the actual earning power.
Successful standardisation requires objective analysis of cost patterns over several years and an honest assessment of what actually deviates from normal operations.
How do you prevent personal expenses of the DGA from affecting the valuation?
Personal DGA expenses affect valuation by distorting actual business expenses. Correct identification requires systematic analysis of all expense items that may be of a private nature, followed by full normalisation to business levels.
Typical personal expenses through the company include private car expenses, entertainment expenses for personal purposes, family holidays as business trips and rent for private rooms. These expenses artificially increase operating expenses and reduce visible profitability.
The impact on business valuation is directly measurable. At a valuation multiple of 5x EBITDA, every €20,000 of normalised personal costs leads to €100,000 higher enterprise value. This leverage makes correct identification highly financially relevant.
Documentation is crucial for buyer acceptance. Any standardisation should be substantiated with concrete evidence such as invoices, contracts or usage records showing private character.
Prevention starts with separating business and personal expenses in advance. Entrepreneurs looking to sell their business are better off eliminating all questionable expenses a year before the sale than having to account for complicated normalisations afterwards.
What market-based salaries should you use for standardisation?
Determine market-based salaries for standardisation by benchmarking against similar positions in the industry, taking into account company size, complexity and regional differences. Document all adjustments with external references for acceptance during due diligence.
DGA remuneration often deviates from market levels. Some owners take minimum salaries for tax reasons, others pay themselves above market levels. Both situations require normalisation to what an external manager would cost.
For benchmarking, use salary surveys from relevant industry associations, HR consultancies or specialised databases. Make sure you compare with jobs of similar size and responsibility, not just by title.
Family members on the payroll are a separate concern. Their remuneration should be fully market-based or normalised. Buyers will not accept a “family allowance” and will often immediately dismiss non-productive family members from the organisation.
Document every salary adjustment with external sources. Keep benchmark reports, job descriptions and market surveys that support the levels used. This documentation prevents discussions during professional sales assistance, where buyers critically assess all normalisations.
What are the dangers of normalising future investments?
Normalising future investments undermines credibility because it is based on plans rather than realised results. Buyers only accept normalisations for actual costs incurred or concrete contractual obligations.
Entrepreneurs tend to include planned cost savings, efficiencies or synergy gains in normalised figures. This is fundamentally flawed because it presents future expectations as historical performance.
The credibility of all normalisations comes under pressure when buyers discover one forward adjustment. They then start assessing all other normalisations more critically and may question the entire figure.
Realistic normalisation is limited to historically demonstrable deviations from normal operations. Consider actual reorganisation costs incurred, completed legal proceedings or permanently terminated activities.
Future improvements belong in the business case and growth strategy, not in normalised historical figures. Buyers appreciate transparency about opportunities, but want to see it separated from proven performance.
How do you document normalisations for a compelling business case?
Effective documentation of standardisations requires systematic recording of each adaptation with supporting evidence, a clear explanation of the rationale and a clear presentation that allows verification by buyers.
Create a detailed standardisation statement per cost item with amounts, time periods and substantiation. Each line should be traceable to source material such as invoices, contracts, decisions or external reports.
Structure the documentation logically: start with the largest normalisations and work down to smaller items. Group related adjustments and avoid splitting up related cost blocks that can create confusion.
Prepare a managementsummary that shows the overall impact of normalisations and briefly explains the main adjustments. This summary helps buyers understand the main points before studying the details.
Test the documentation by having an independent party check the normalisations. What seems logical to you may be unclear to outsiders. Good documentation should be self-explanatory, without verbal explanations.
Correct normalisation of business results is the basis for reliable business valuation and successful transactions. Through a systematic approach, realistic adjustments and thorough documentation, you avoid the most common errors that can undermine valuations. For complex normalisation issues, it is advisable to seek timely professional advice via contact with specialist corporate finance advisers.
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