Recasting: Demonstrate to the Financial Earning Power of Your Business

Katie Fleming

Katie Fleming

Co-founder and COO of Owner Actions

A pen, spreadsheet, and a calculator lay on a desk, ready to be put to use for recasting.

Marketing can go a long way in attracting potential buyers to your business, but it won’t be enough to drive your buyers to make an offer. Buyers want more: They want to see a high-performing business that runs effectively—and makes a lot of money doing it.

There are tons of design and operational strategies you can use to make your business more efficient and effective, and it can pay off to introduce some of those practices before you attempt to sell. But, at the same time, you should be looking for ways to prove your business’s financial wellbeing and earning power. One strategy that you should consider is recasting.

 

What is recasting?

Recasting is a way to reconstruct your financial statements so that they demonstrate the true earning power of your business.

 

Shouldn’t my business’s financials already demonstrate its earning power?

In many cases, no, especially if you’ve worked with accountants who are savvy in tax law. Many recommend an accepted style of reporting that underestimates your earnings to help you realize tax savings. To do this, your accountants may have allowed you to include expenses that could be considered “superfluous, excessive, or discretional” to strategically diminish your earnings. This practice is legal, and it helps many business owners to realize hefty amounts of year-over-year savings.

 

But while deflating your earnings may help you to save on taxes, it also makes your business appear less profitable. This becomes a problem when it's time to sell your business. Here's why: Prospective buyers will want to see robustness in your business’s financial statements. They’ll want clear indicators that your business is performing well and earning attractive returns.

To show the true earning power of your business, you can remove some of the expenses you included, especially those that aren't essential for ongoing business operations. You and your accountant can recast your financial statements to provide an authentic view of your business’s current performance and profitability and help buyers make better projections about the long-term potential of your business.

 

How do I begin recasting?

With an accountant, you’ll pour through your expenses and single out two categories:

  1. The one-time expenses that future owners won’t incur
  2. The expenses you incurred that weren’t vital for the operations of your business

 

Here's why you're singling these out: It’s possible that both kinds of expenses could be construed as earnings rather than expenditures because they’re unlikely to be realized by the future business owner.

Through the recasting process, your accountant may advise you to add back the following expenses:

  • Indirect owner compensation and personal expenses such as vehicles for personal use, meals, phone bills, club memberships, and travel that are unrelated to the business
  • One-time legal fees or professional expenses that aren’t an everyday occurrence in your business
  • Owner compensation and bonuses that exceed the market value of a person who’d manage a similar business
  • Transactions with related parties that may not occur at market rates
  • Charitable contributions made by the business that won’t continue into the future
  • The write-off of bad debts

 

Your accountant can help you add up how much you’ve expensed in these categories over each of the last three years and add the total back to the profit summation of your business.

Your buyers will see the addbacks occur, and they may have questions. Prepare for them by including a note of explanation for every add-back you make.

What will buyers think of this practice?

This practice can raise a red flag for buyers.

Your pool of buyers will likely have questions about each add-back, and you should have a reasonable explanation of why those items should qualify. Your answers could impact your credibility with buyers, so above all, you must remember to be honest, earnest, and realistic about the true cost expectations of your business.

 

How do I find an accountant who can help me through the recasting process?

You'll need an accountant who's familiar with this process to ensure it's done correctly. Firms like these can help you take on this task:

 

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Reconciled

Your Business Deserves the Very Best

Reconciled is an award-winning organization and one of the fastest-growing accounting firms in the country. Their team of entrepreneurship gurus, e-commerce pros, and tech-loving cloud accounting specialists look at your business holistically and help you analyze your spending, measure costs, and find opportunities to enhance margin and profitability, along with taking on your day-to-day bookkeeping. Want to learn more? Click the connect button below for an introduction.

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Xendoo

Be Tax Ready All Year Long

With Xendoo, you can access a dedicated team of expert CPAs and accountants who provide monthly bookkeeping, tax preparation and filing, and tax consulting, three services that will help you stay on top of all your financial needs. Their team can also help you with your personal tax returns, too. You can explore their plans with totally transparent pricing by following the link below, and for a limited time, you can try their online bookkeeping service free for one month. Restrictions may apply. See Xendoo's site for details.

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1-800Accountant

Say Hello to Better Online Accounting

Business owners love 1-800Accountant. Here's why. First, the service pairs you with a CPA who is an expert in your state and industry and can answer the tough questions you have about your business. Second, while many others charge by the hour, or worse, by minute, 1-800Accountant sets you up with an affordable, flat-rate pricing plan so you always know what you'll be paying. Follow this link to try 1-800Accountant for 30 days with a money-back guarantee.

 

And, be sure to read our guide: How to Find an Accountant Who Can Help You Sell Your Business.

 

What’s next?

Once you ensure that your financials are in good order, find the pros who will serve as your exit team:

Hire a broker to help you to prepare your business for sale, develop marketing collateral, and connect you with a pool of potential buyers.

Meet with a valuation specialist to determine a fair asking price for the real estate, assets, and inventory of your business.

Retain a lawyer who can help you draft a non-disclosure agreement (NDA), review offers, and negotiate terms.

Would you like us to help you find your exit team? Use the search tool at the bottom of your screen to connect with pros who can support you through your sale.

 

Interested in articles and advice to simplify the sale of your business? Log into your owner’s portal to learn how to find buyers, negotiate terms, and attain a fair asking price for the business you’ve worked hard to build.

Want to take on other tasks?

Come see the free step-by-step guide business owners love.

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