Mergers & Acquisitions

Resources: Glossary

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Normalized Financial Statements / Normalized Financials

Definition

Financial statements that have been adjusted by adding back discretionary expenses (non-essential to operations) to net pre-tax operating profit to estimate a company’s economic cash flow (i.e., SDE or EBITDA), versus cash flow produced for tax purposes.

See Also

SDE, EBITDA.

Example

An example of an unusual item that would be adjusted includes expenses related to a natural disaster or income from an insurance settlement that is not in the ordinary course of business.

Tips

Most business owners manage their small businesses with the goal of minimizing taxable income by deducting expenses that are not directly related to the business’s operations. For this reason, it is often necessary to adjust the financial statements by “adding back” these expenses in order to show potential owners the actual cash flow available. Adjusting the financials allows someone to compare a business with other businesses using seller’s discretionary earnings (SDE) or EBITDA.

Related Resources

Adjusting Financial Statements: A Complete Guide

EBITDA | Definition, Formula & Example – A Complete Guide

Seller’s Discretionary Earnings (SDE) | Definition & Examples

Should I use SDE or EBITDA to value a business?