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Full transcript by James Nolletti below.
Company cell phone, cars, and paychecks for the children are non-essential business expenses that would be considered by a fair market buyer and a fair market seller in a hypothetical sale. A forensic accountant would add them back to the cash flow in the normalization process. The normalization process refers to adjustments made in business valuation methodology, the goal of which is to estimate future expected cash flow that a potential buyer can reasonably expect to receive in return for his or her investment and to prevent information that is on a basis similar to that of other companies in this peer group.
There are various categories of normalization adjustments that could be made depending upon the particular set of facts and circumstances. For example, excess or deficient officers compensation or benefits, excess or below market rent paid to a shareholder, personal travel, entertainment expenses, going through the normalization process will result in a valuator using normalized income that will better reflect the true economic income of the particular business, and allow for a better comparison with other similar businesses and their values.
