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Normalization of EBITDA

Whether a business owner manages their books like Homer Simpson or Ned Flanders, various adjustments are always needed (starting with net income before tax) to arrive at Normalized EBITDA. The key is to review the general ledger and keep only legitimate business expenses that are normal and recurring in nature, and paid for at market value. Anything else should be eliminated (see examples below).

Normalization of EBITDA for Homer Simpson

DescriptionAmount
Starting Point: Net income before tax$145,000
Add back: Interest expenses$2,000
Add back: Amortization$5,000
Add back: Depreciation$3,000
Add back: Personal meals and entertainment (mostly at Moe’s Tavern)$9,500
Add back: Golf dues$10,000
Add back: Personal home repairs$45,000
Add back: Personal travel (to see Uncle Herb)$7,000
Add back: Tax penalties and interest$750
Add back: Marge’s personal shopping$1,500
Add back: Personal car repairs and gas$10,000
Subtract: Investment income – interest income-$6,000
Subtract: Investment income – capital gains-$5,000
Add back: Salaries paid to Homer himself$10,000
Less: FMV of Homer’s role & duties-$50,000
Add back: Home office expenses (not used for business)$10,000
Add back: Salaries paid to Bart & Lisa for income splitting$5,000
Add back: Other one-time, non-recurring or non-business expenses$10,000
Add back: Lisa’s saxophone purchase$1,000
NORMALIZED EBITDA$213,750

Normalization of EBITDA for Ned Flanders

DescriptionAmount
Starting Point: Net income before tax$500,000
Add back: Interest expenses$2,000
Add back: Amortization$5,000
Add back: Depreciation$3,000
Add back: Church donations$10,000
Add back: Life insurance premiums$15,000
Add back: Funeral expenses for Maude$10,000
Subtract: Investment income – interest income-$6,000
Subtract: Investment income – capital gains-$5,000
Add back: Salaries paid to Ned himself$100,000
Less: FMV of Ned’s role & duties-$125,000
Add back: One-time office repairs$25,000
Add back: Professional fees related to Maude’s death$10,000
Add back: Salaries paid to Todd and Rod$10,000
Less: FMV of salaries for Todd and Rod-$20,000
Add: Unusual bad debt$10,000
Add: Property taxes, interest and insurance (company owned building)$44,000
Less: FMV of rent on building-$56,000
Add back: Other one-time, non-recurring or non-business expenses$20,000
NORMALIZED EBITDA$552,000

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