Selling a Business: Recasting Financial Statements

When selling a business, it is important that the seller procure a business valuation before embarking on the search for potential buyers. Professional business valuators look at a variety of factors in order to determine the company’s true worth, including factors outside of basic book value. Income statements and balance sheets must often be adjusted in order to find a more accurate picture of the company’s value. Those selling a business need to present their company information in a positive light in order to interest potential buyers.

One way in which this can be accomplished is through recasting financial statements. While the phrase may make it sound like the process is slightly underhanded, it actually assists the buyer in understanding the core value of the business separately from how it is managed. Recasting financial statements allow for a more accurate depiction of the company’s worth. The buyer may not utilize all of the same tax tactics as the current owner, and therefore the revenue after acquiring the company may prove to be drastically different than how it appeared before the acquisition. The buyer will want to see that the cash flow remains reasonable under new management.

The following financial statements are the ones most frequently recast. The sum of each of these categories should be adjusted within business’s total revenue.

Owner Compensation

If the owner is compensated in a drastically lower or higher than average figure, it is important that this is recalculated. It is important for the buyer to realize the cost of hiring someone to replace the duties of the business owner. Therefore, the cost of paying another individual to perform the duties of the owner should be deducted from business expenses.

Non-Recurring Expenses

Any expenses that are irregular, such as legal fees or debt write offs, should be subtracted from the financial statements, as the new owner will most likely not experience these expenses again under new management.

Non-Cash Expenses

Adjustments should be made for depreciation and amortization of both fixed and intangible assets.

Extraneous Expenses

Expenses that are not necessary for the company to run, such as “perks” or excessive travel, should be removed from the financial statements. It t is vital that one be able to draw a line between a necessary expense, such as a functional business vehicle, and a luxury car write off.

Each recasting should be clearly defined in the business statements so that the buyer understands from where the change in numbers derives. Being open and honest with the buyer is the best way to earn their trust, and therefore, their business.

If you would like assistance in valuating or selling a business, George & Company would be happy to support you in all of your M&A needs. Contact us to learn more about how we can present your company in a light that will attract buyers.