Why is normalized income so important when selling a business?

When you sell a business, everyone wants to know how much money does it make? Although that may seem like a very straight forward question, the answer is not that straight forward. Private business owners typically put in many personal expenses through their business, they may income split with family members, they may put a variety of other expenses through that will not be a required expense for the new owner. The definition of normalized earnings is the earnings that should be enjoyed by the new business owner after he/she acquires the business?

The items which are considered normalized earnings are often disputed by the buyer and seller because the value of the business is dependent upon the definition of profits/normalized earnings of the business. What is an extra expense to one person may be normal to another. Clearly paying a salary to a family member who is not working in the business is not a normal expense and would be added back.

I have seen people say that I went on a business trip and say it was personal. They claim that they saw one client in another city then continued on a holiday – is that personal or business? I knew of another who was a member of a buying consortium and the members would meet once a year in their respective countries. They discussed business for an hour or two, was the trip business or personal?

Read more