Appendix D Sample Normalization Adjustments

• Jurisdiction: United States

Appendix D Sample Normalization Adjustments

The following list provides common areas to review for potential normalization adjustments that may be used in financial analysis and/or the preparation of a business valuation. Generally, normalization adjustments are not intended to present financial results in conformance with GAAP guidelines. Normalization adjustments often include unusual or nonrecurring items, nonoperating items, controlling adjustments and adjustments based on accounting policies and other normal practices of the industry. This list is not comprehensive, and the analyst should carefully assess the subject company for all potential adjustments based on considerations, including: type of entity, industry, basis of presentation of financial information (GAAP or otherwise), ownership structure and interest, and purpose of the valuation. See also Appendix C and the related discussions in Chapters 6 and 7.

Unusual, Nonrecurring and Extraordinary Items

• One-time realization of revenues or expenses due to nonrecurring contracts
• Gain or loss on the sale of a business unit or business assets
• Discontinued operations
• Corporate restructuring, including downsizing costs and the costs of discontinued operations
• Excess or below-market rent rates for the duration of a lease agreement
• Excess or deficient compensation/benefit items
• Excess or deficient entertainment and travel expenses
• Excess or deficient automobile expenses
• Lease/rental expenses
• Fire, flood, or other casualty — both physical damage and business interruption to extent not covered by insurance
• Strikes or other work stoppages
• Litigation costs, payments or recoveries
• Insurance proceeds received on the life of an important or "key" person or from a property or casualty claim
• Other items that are not reasonably expected to recur in the foreseeable future

Nonoperating Items

• Excess cash or working capital
• Marketable securities (if in excess of reasonable need of the business)
• Real estate (if not used in business operation, or in excess of business requirements)
• Private plane, entertainment or sports facilities (e.g., hunting lodge, transferable season ticket contracts, skyboxes, etc.)
• Unsold plant facilities that have been replaced
• Significant investments in unrelated companies
• Equity investment
• Loans to support nonoperating assets
• Interest expense
• Antiques, private collections, etc.
• Other items not related to the core operations of the business,

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