Check the reason and the evidence.
The A$25,000 add-back assumes the relocation expense was charged to reported EBITDA, is genuinely non-recurring and will not require replacement expenditure. Those assumptions need support in an actual engagement.
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A valuation conclusion is more useful when you can follow the reasoning behind it.
A FICTIONAL WORKED EXAMPLE
What sits behind
an earnings adjustment?
This educational illustration uses an owner-managed trading business and invented figures. It demonstrates one earnings adjustment process; it is not a client case or a signed valuation opinion.
| Item | Effect on EBITDA |
|---|---|
| Reported EBITDA | A$320,000 |
| Assumed non-recurring relocation expense | +A$25,000 |
| Additional replacement management cost | −A$60,000 |
| Illustrative adjusted EBITDA | A$285,000 |
The A$285,000 result is an illustrated earnings input. Further analysis is required to reach a business value conclusion.
Adjust the difference.
Owner-management remuneration of A$40,000 is already expensed in the reported result. For this fictional example, equivalent replacement management cost is assumed to be A$100,000 on a comparable cost basis. The additional expense is A$60,000.
What else informs the value conclusion?
- The valuation subject, purpose, date and basis of value.
- Current trading, expected performance, customer concentration and reliance on key people.
- Reinvestment, working capital, relevant market evidence and the suitability of valuation approaches.
Financial adjustments can increase or decrease an earnings measure. Each needs a reason and supporting evidence.
Further reading: ASA Business Valuation Standards (February 2022), BVS-II: Financial Statement Adjustments ↗
Start with the question.
A report identifies the subject of the valuation, its intended purpose, valuation date and the interest being valued. Scope and intended users matter when interpreting the conclusion.
ASK THISWhat is being valued, at what date, and for what purpose?
Look behind the earnings.
Financial performance is considered in the context of the business. Any adjustments to reported results should be explained, with their evidence, rationale and limitations.
ASK THISWhich figures have been adjusted, and why?
Make the reasoning visible.
A report explains the methods selected, the inputs applied and the reasoning behind them. The approach needs to suit the business and the purpose of the engagement.
ASK THISHow do the selected methods connect to this business?
Understand what drives the result.
Material assumptions and relevant business risks belong alongside the analysis. The report should help readers understand where judgement and uncertainty affect the conclusion.
ASK THISWhat would materially change the conclusion?
Read the conclusion in context.
The value conclusion is read together with the report’s purpose, assumptions and limitations. A conclusion prepared for one purpose may not be suitable for another.
ASK THISHow may the report be used, and what are its limits?
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