Normalized earnings are financial results adjusted to represent a selected view of a firm’s ongoing operations.
Definition
Normalization starts with reported financial results and considers adjustments intended to show the earnings associated with ongoing operations. Possible items include unusual costs, nonrecurring income or expense, and owner compensation or personal expenses recorded in the business. Each proposed adjustment needs supporting records and a clear explanation. For a civil engineering firm, an adjustment should account for whether the cost would recur under a new owner, such as compensation for work the owner currently performs. Buyers, sellers, and advisers may disagree about which items qualify or how to treat them. Firms may also use different periods and accounting bases, so the resulting figures may not be directly comparable. Normalized earnings are not the same as reported earnings, cash flow, or a guaranteed forecast. The adjustments do not change the historical books; they create an analytical view for a defined purpose. The AICPA provides resources on valuation services.
How owners use it
- Maintain records and explanations for each proposed adjustment to reported results.
- Review whether an owner-related cost would continue after a sale or need to be replaced by another expense.
- If reported earnings are $700,000 and a supported one-time cost of $40,000 is added back, then $700,000 + $40,000 = $740,000 normalized earnings.
- Compare normalized results with reported financial statements and check that adjustments are applied consistently across periods.
