Normalised Earnings
Adjusted profit figures removing one-off, non-recurring, or owner-specific items to show sustainable profitability.
Full Definition
Normalised earnings are adjusted profit figures that remove exceptional, non-recurring, or owner-specific items to present a clearer picture of a business's sustainable profitability.
Common normalisation adjustments: Add-backs (increase earnings):
- Owner salary above market rate
- Owner personal expenses through business
- One-off professional fees (M&A, litigation)
- Non-recurring costs (restructuring, redundancy)
- Related party transactions above market rate
- Start-up costs for new initiatives
Deductions (reduce earnings):
- Below-market rent from related parties
- Unpaid owner time/services
- Non-recurring income (insurance claims, grants)
- One-off contract profits
- COVID support (furlough, grants)
Why normalisation matters:
- Basis for valuation (applying multiples)
- Demonstrates sustainable profitability
- Enables comparison between businesses
- Identifies true earnings power
Best practices:
- Document each adjustment with supporting evidence
- Use market-rate benchmarks for owner adjustments
- Be conservative and defensible
- Distinguish one-off from recurring adjustments
- Consider quality of earnings review findings
Buyers will scrutinise normalisation adjustments carefully, so sellers should prepare detailed schedules with supporting documentation.
Related Terms
EBITDA
Earnings Before Interest, Taxes, Depreciation, and Amortisation – a key profitability metric used in valuations.
Quality of Earnings (QoE)
A financial due diligence analysis assessing the sustainability and accuracy of a company's reported earnings.
Valuation
The process of determining the economic worth of a business for sale, investment, or other purposes.
Multiple
A valuation ratio comparing price to a financial metric, such as revenue or EBITDA, used to value businesses.