What is Financial Normalisation?

Most small-to-medium business financials are prepared for the IRD, which means they are optimized to minimize tax. Financial Normalisation is the clinical process of reversing those tax-driven adjustments to reveal the actual economic performance of the business—what we call the Seller’s Discretionary Earnings (SDE).

We achieve this through three primary adjustments:

1. The $145k Market Salary Benchmark

In many private companies, the owner’s salary is dictated by tax planning rather than the "market rate" for their job. To find the true value of the business, we replace the owner's actual draw with a consistent $145,000 NZD market benchmark.

• Why we do this: This represents the realistic cost a buyer would incur to hire a competent manager to run the daily operations. It ensures the "True Profit" is not artificially inflated or deflated by the owner's personal drawings.

2. The Neutralization of Interest Expense

We "add back" all interest expenses related to the business's current debt, such as bank loans or equipment finance.

• Why we do this: Interest is a financing cost, not an operating cost. Because different buyers will have different ways of funding the purchase (some with cash, some with high-interest loans), we must value the business on a "Debt-Free" basis. By adding back interest, we show the business’s ability to generate cash regardless of how it is financed.

3. Discretionary "Add-Backs"

We identify and "add back" expenses that are unique to the current owner and would not necessarily be required by a new owner to maintain the business’s performance. Common add-backs include:

• Non-Cash Items: Such as depreciation, which is an accounting entry rather than an actual cash drain on the business.

• Personal Expenses: Items like personal phone plans, motor vehicle expenses, or memberships that are run through the business for tax purposes.

• One-Off Costs: Unusual legal fees, major repairs, or rebranding costs that won't repeat annually.