Normalised earnings are not the seller’s profit with every favourable add-back accepted. They are a buyer-tested estimate of the earnings the accounting practice could maintain under the buyer’s ownership, after allowing for the people, systems, premises and professional obligations needed to keep delivering the work.

Start with a reported result that can be traced to source records. Then assess each adjustment separately, with evidence, across several periods. The useful output is a bridge from reported profit to a supportable base case, accompanied by downside cases and a list of unresolved items—not one precise number detached from how the practice operates.

What normalised earnings should answer

The question is not simply, “What did the seller earn?” It is, “What earnings could this buyer reasonably maintain from the clients, team and operating platform that will actually transfer?” That distinction matters in a partner-led practice. Revenue may depend on the seller’s relationships and chargeable hours, while expenses may omit a commercial cost for their replacement.

Define the starting metric before comparing years. EBITDA, profit before tax, partnership profit and owner cash drawings are not interchangeable. Confirm the entity, accounting basis, period and preparation status. ASIC notes that a financial report generally contains more than a profit and loss statement, including financial position, cash flows, changes in equity and notes (ASIC). Identify what assurance, if any, attaches to the figures supplied.

Normalised earnings are not cash flow or a formal valuation. Working capital, tax, debt service, transaction costs and future capital expenditure need separate analysis. Do not apply an asking-price multiple until the earnings base, transfer perimeter and risks are understood.

Establish a reliable reported result

Request at least three complete financial years plus current year-to-date monthly results, then reconcile them to underlying records. The period should capture tax-season peaks, quieter months, billing changes and unusual events. Useful evidence includes:

  • profit and loss statements, balance sheets, general ledgers and trial balances by entity;
  • bank statements, BAS and income-tax records, invoices, receipts and billing-system exports;
  • revenue by client, service line, partner and month, including write-offs, credits and refunds;
  • WIP movements, debtor ageing, collections after period end and bad-debt history;
  • payroll, superannuation, contractor costs, timesheets, utilisation and leave balances;
  • software, insurance, rent, outsourcing, training and professional-membership costs; and
  • a line-by-line schedule of proposed adjustments, naming the period, amount, rationale and evidence.

ASIC says companies generally must keep records that explain transactions, financial position and performance and enable accurate financial statements; examples include ledgers, bank statements, tax returns, contracts, wages and superannuation records (ASIC). Gaps or unexplained reconciliations reduce confidence in the earnings claim.

Test adjustments by category

Use a consistent rule: an adjustment should reflect a difference between the historical accounts and the buyer’s maintainable operating case. It needs evidence and symmetrical treatment—buyers should recognise adverse as well as favourable changes.

Area Buyer test Common mistake
Owner labour Map the seller’s management, review, client and production hours; price the roles still required Adding back all owner remuneration without a replacement cost
Revenue Test recurrence, retention, pricing, WIP conversion and revenue cut-off by client and service Treating every recent fee as transferable and repeatable
Staff Model the team needed for the workload at lawful, market-informed total employment cost Assuming vacancies, overtime or below-market pay will persist
Operating costs Rebuild software, rent, insurance, licences, outsourcing and compliance under the buyer’s structure Removing related-party or seller-specific charges without a substitute
One-offs Confirm the item is unusual, evidenced and unlikely to recur in the buyer’s case Labelling ordinary recruitment, remediation or marketing as exceptional
Accounting policy Reconcile cash versus accrual treatment, WIP, debtors, depreciation and provisions Mixing cash receipts, billings and accounting revenue

Owner remuneration deserves particular care. Depending on structure, it may appear as wages, management fees, partner distributions or not as an expense at all. Separate payment for ownership from the market cost of work. If the seller performs technical review, business development and management, the buyer must either do that work, allocate it to existing capacity or employ someone capable of doing it.

Employment costs require a fresh calculation rather than a simple payroll roll-forward. The Fair Work Ombudsman explains that applicable minimum pay may arise from an award or agreement and can include penalty rates and allowances; rates are reviewed over time (Fair Work Ombudsman). Ask an employment adviser to confirm classification and entitlements, and allow for superannuation, leave, payroll tax where applicable, recruitment and credible salary adjustments.

Build the earnings bridge

For each year and the current run rate, prepare a bridge showing reported amount, proposed adjustment, buyer treatment, evidence and sensitivity. Classify each item as accepted, rejected, modified or unresolved.

Hypothetical example: a practice reports $420,000 profit. The seller proposes adding back $180,000 of owner remuneration and $30,000 of exceptional recruitment fees. The buyer’s role map indicates $210,000 of recurring replacement employment cost, including expected on-costs, and the buyer identifies $20,000 of annual software and compliance expenditure not reflected in the historical structure. If the recruitment cost is genuinely non-recurring, the illustrated bridge is $420,000 + $180,000 + $30,000 − $210,000 − $20,000 = $400,000. This is only a hypothetical arithmetic example, not a valuation or forecast. Client loss, fee pressure or delayed WIP collection could produce a lower outcome.

Next test at least a base, downside and transition case. Vary the few drivers that matter: retained recurring fees, seller-originated work, chargeable utilisation, write-offs, wages and software duplication. Avoid false precision. A range tied to observable evidence is more decision-useful than a single number that assumes every client, employee and efficiency transfers intact.

Practice-specific costs that may be understated

A tax or BAS practice carries service-record obligations that should be reflected in the operating model. Current TPB guidance says registered tax practitioners must keep records of services provided to clients, including former clients, and that records must capture the nature, scope and outcome of services and, for complex matters, relevant facts, assumptions and reasoning (TPB).

That does not determine whether records or engagements transfer in a particular transaction. It does mean a buyer should test whether the normalised case funds appropriate practice-management systems, supervision, review, secure record handling and competent staff. If historical profit reflects deferred file remediation, unsupported offshore leverage, excessive partner review hours or obsolete software, the cost of a sustainable model may be higher.

Decision rules and specialist advice

Treat an adjustment as unresolved when its amount cannot be reconciled, its recurrence is disputed or its treatment depends on an uncosted post-settlement plan. Ask your accountant to assess accounting policies, earnings quality, tax implications and the bridge. Legal advisers should address deal perimeter, employment, client and data transfer, restraints, warranties and retention mechanisms. A valuation specialist should determine the methodology; normalised earnings are an input, not the valuation itself.

Pause if the base case requires all favourable adjustments but ignores identifiable losses, if owner replacement is not operationally credible, or if the seller will not provide client-level and ledger evidence under appropriate confidentiality arrangements.

Frequently asked questions

How many years should a buyer review?

Three complete years plus current monthly trading is a practical starting point, not a universal rule. Extend the period where pricing, ownership, staffing or service mix changed, and explain why earlier periods are or are not comparable.

Should the buyer accept forecast synergies?

Keep buyer-specific synergies separate from stand-alone normalised earnings. Document their implementation cost, timing, capacity and execution risk. Paying the seller today for savings the buyer must create later can blur price and performance.

Sources

Disclaimer

This article provides general information only. It does not constitute legal, tax, accounting, financial, credit, valuation or other professional advice. Circumstances differ. Obtain advice from appropriately qualified advisers before acting or entering a transaction.