A normalisation adjustment restates a private company's historical earnings for one-time, related-party or owner-specific items, so a buyer prices the business as it would run under new, market-rate ownership rather than under its current owner's particular arrangements.
The clearest Canadian description of what gets normalised is deavo's comparison of the two earnings measures brokers use for private-company deals: seller's discretionary earnings adds back "interest, one owner's compensation and benefits, and discretionary or non-recurring expenses" to show "total cash flow available to a single owner-operator," while EBITDA treats owner pay differently, "on the assumption that the business already pays … a market wage to whoever runs it." Which measure a deal is discussed in decides which adjustments even apply.
Not every distortion can be normalised the way owner compensation can. Deavo's own article on owner-dependence draws that line directly: dependence on the departing owner "rarely shows up as a line item anywhere in the financial statements, which is exactly why it is easy for a seller to underestimate and hard for a buyer to ignore," and its effect "depends heavily on the specific industry and how replaceable the owner's role actually is." A below-market salary is a normalisation adjustment with a defensible dollar figure; the risk that customers leave with the owner is not — deavo's own source on owner-dependence gives no quantified figure for it at all, and neither does anything else available here.
Where the resulting normalised figure feeds a formal opinion, the engagement is governed by CBV Institute's Practice Standard 100, "Valuation Conclusions and Valuation Reports," which sets "the minimum requirements for a valuator to establish a credible and properly supported conclusion of value," effective for engagements beginning on or after 1 January 2026 (see Chartered Business Valuator).
A private company pays its founder $60,000 a year, though a non-owner general manager doing the same job would command roughly $140,000 in that market and sector — a fact the buyer confirms against comparable postings before relying on it. The normalisation adjustment is $140,000 minus $60,000, i.e. an $80,000 deduction from reported earnings (the business is really $80,000 less profitable once a market-rate manager is paid to run it). Separately, the founder personally holds the firm's three largest customer relationships; the buyer does not attempt to normalise that risk into a dollar figure and instead prices it through deal structure — an earn-out or a post-closing transition period — rather than a spreadsheet add-back.
See also: EBITDA bridge · Adjusted EBITDA · Discount for lack of marketability.
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