The key to normalizing the results of operation of a privately held company lies in the valuator’s understanding of the competent management assumption.  This assumption, a standard inclusion in the Assumptions and Limiting Conditions of a valuation report, states (as included in our firm’s standard report, having been borrowed from other sources) "Management is assumed to be competent, and the ownership to be in responsible hands, unless noted otherwise in this report.  The quality of business management can have a direct effect on the viability and value of the business.  The financial forecast contained in the appraisal assumes both responsible ownership and competent management unless noted otherwise.  Any variance from this assumption could have a significant impact on the final value estimate."  How does the valuator determine whether management is competent, and if not, what kinds of normalization adjustments should be made and how can they be justified?

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