Income Approach – Normalization Adjustments

• Adjustments for the discretionary expenses of the Business

• Owners’ compensation and Family member compensation

• Travel and Entertainment

• Rent (related party expenses)

• Separation of Assets/liabilities not necessary for the operations of the Business

• Non-operating assets

• Personal loans

• Unused real estate

• Adjustment of historical statements to be more representative of future performance

• Non-recurring or non-operating expenses, such as litigation fees or person expenses

• Extraordinary Items that do not occur in a “normal” operating year

Discount Rate

• The terms “discount rate”, “required rate of return” and “cost of capital” are all synonymous

• There is a negative relationship between risk and return, and there is a negative relationship between the discount rate and value.

• There are several ways to calculate the discount rate, but it involves a “cost of equity” and a “cost of debt” to calculate a “weighted average cost of capital” (WACC).