A listed company's reported earnings have been shaped by an auditor, a board, an audit committee and the knowledge that analysts will model them. A private company's reported earnings have been shaped by a tax return.
That is not an accusation. A promoter-owned business is legally entitled to pay its owner a salary, rent premises from a family trust, and choose accounting policies within the standard. The consequence is simply that reported profit measures something other than the business's economic earning power, and the buyer's first job is to rebuild the second from the first.
Worked example: Vaishnavi Engineering Works
Vaishnavi Engineering Works Private Limited (synthetic) makes precision castings near Coimbatore. Revenue ₹68.00 crore, reported EBITDA ₹7.20 crore at a 10.59% margin, depreciation and amortisation ₹2.30 crore, interest ₹0.80 crore, so reported profit before tax is ₹4.10 crore.
Five adjustments, in the order a diligence team finds them.
Owner compensation is the largest and the least contentious in principle. The promoter draws ₹2.40 crore; a professional chief executive plus a finance head for a business this size would cost ₹0.90 crore. Add back ₹1.50 crore. The correct benchmark is the market cost of replacing the functions, not the owner's own view of his worth, and the evidence is salary surveys and comparable listed-company disclosures, cited by name in the schedule.
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Related-party charges come next. The factory is owned by a family trust and rented to the company at ₹1.80 crore against a market rent of ₹1.05 crore for equivalent industrial space in the same cluster. Add back ₹0.75 crore. The direction matters: an above-market rent inflates the buyer's normalised earnings when removed, and a below-market rent does the reverse and is the commoner trap, because the seller has no incentive to point it out.
Personal expenses running through the business, here two family cars, foreign travel with no customer attached, and club memberships, total ₹0.35 crore. These are found in the ledger detail, not the financial statements, and finding them is a data-room exercise rather than an analytical one.
Non-recurring items run in both directions and this is where analysts get sloppy. A one-time export incentive receipt of ₹0.62 crore sits in other income and must be removed. Legal costs of ₹0.28 crore on a land dispute settled this year must be added back. Removing only the costs and keeping the windfalls is the most common form of normalisation bias, and a schedule with no negative adjustments in it should be assumed incomplete.
| Adjustment | ₹ crore |
|---|---|
| Reported EBITDA | 7.20 |
| Owner compensation above market | +1.50 |
| Related-party rent above market | +0.75 |
| Personal expenses | +0.35 |
| One-off export incentive removed | −0.62 |
| One-off legal costs added back | +0.28 |
| Normalised EBITDA, company's own policy | 9.46 |
That is a 31.39% uplift on reported EBITDA, and the margin moves from 10.59% to 13.91%.
The accounting-policy adjustment most schedules miss
The fifth adjustment is different in kind and is the one most schedules miss. Vaishnavi expenses tooling as incurred; its listed competitors capitalise tooling and amortise it over four years. This year's tooling spend is ₹1.20 crore, and the steady-state amortisation charge on a comparable pool under the peer policy would be ₹0.95 crore. Restated to the peer policy, normalised EBITDA is ₹10.66 crore, D&A is ₹3.25 crore, and EBIT is ₹7.41 crore against ₹7.16 crore on the company's own policy.
An accounting-policy difference of ₹0.25 crore at the EBIT line becomes ₹1.20 crore at the EBITDA line, and a multiple applied to EBITDA multiplies the policy difference rather than the business. At the 9.0x peer median, reported EBITDA gives an enterprise value of ₹64.80 crore and peer-policy normalised EBITDA gives ₹95.94 crore. The gap is ₹31.14 crore, or 48%, of which ₹10.80 crore is the tooling policy alone.
State the rule this way and it will not leave you: the multiple must be applied to a measure computed the way the comparables compute it. A rigorous comps table with a sloppy normalisation schedule underneath it is a precise answer to a question nobody asked.
What else belongs on a normalisation schedule?
Two entries belong on every normalisation schedule and are frequently absent. The first is a line for what you could not adjust, such as a promoter's personal guarantee on the company's borrowings, which has a real cost that will not survive the sale and which no ledger records. The second is the tax rate the normalised earnings should carry, since a company taxed as a closely-held entity and a company inside a buyer's group may face different rates. Vaishnavi is taxed under India's concessional corporate regime at 22% plus surcharge and cess, an effective 25.168% (Section 115BAA; this rate and the surcharge and cess factors are set by the Finance Act and move, so check against the current Act before use). Normalised NOPAT is 7.41 × (1 − 0.25168) = ₹5.5451 crore.
Every line in that schedule needs a source sitting behind it in the file. Most schedules carry none.