For valuation purposes, are the financial results for closely held companies often normalized for non-recurring costs and discretionary expenses?

For valuation purposes, closely held companies typically have their financial results normalized to provide a clearer picture of their ongoing operational performance. This normalization process involves adjusting the financial statements to remove non-recurring costs and discretionary expenses that do not reflect the company's regular business activities.

Non-recurring costs can include one-time expenses like legal fees from a lawsuit or costs associated with a significant asset write-down. Discretionary expenses may comprise expenditures that are not essential for the day-to-day operations, such as excessive owner compensation or personal expenses claimed as business costs. By standardizing these financial elements, analysts can better understand the company’s true earning potential and make more accurate comparisons with similar businesses.

Since the process of normalizing financial results is critical for accurate valuation, stating that this is false does not capture the common practice in the industry. Adjustments help investors, acquirers, and other stakeholders make informed decisions based on the company's operational health rather than skewed financials impacted by atypical costs.