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Recasting Financials
A key to building value

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• 15. What Drives Owners to Sell & Buyers to Buy ?  
 
• 16. Frequently Asked Questions - by Jim Clark  
 
• 17. An Overview of the Business Selling Process.  
 
• 18. Recasting - a key to building value to the seller.  
 
• 19. What the Profit & Loss Statement Doesn't Tell You.  
 
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 Recasting - a key to building value to the seller


 
You’re a small business owner.  Chances are you’ll be selling your company to someone who has also been a small business owner.  All small business owners play the "perk game".  Any personal expense the owner can legitimately hand off to the business to reduce taxes is fair in the perk game.  The perk game reduces taxes but the profit and loss statement usually takes a beating.
 
Now that you want to sell your business, it’s time to own up and tell the buyer what you’ve taken out of the business and to what extent it has reduced income-taxable profit.  They won’t think less of you, because they’ve done it too.  You should also admit to inefficiencies that you’ve let slide, because the new owner is much, much smarter than you (at least that’s what they think) and will do a better job than you could ever do to boost sales and profit (at least that’s what they think).
 
The process is called "Recasting".  This means adjusting past financial statements to better reflect true cash flow. This isn’t cooking the books - in fact, you should plainly label recast financials as such.  And you’ll still be providing non-recast financials to the buyer.
 
Here is a quick formula for recasting starting with your last three years of regular financials:
 
- 1. Deduct from expenses the owner’s salary, bonus and all other direct payment to the owner(s).  Then add a reasonable salary for a manager to take your place.  Be realistic here!
 
- 2. Deduct from expenses all non-direct owner expenses: retirement or profit sharing plan contributions, automobile lease or payment, auto insurance, and all other perks the owner receives.
 
- 3. Adjust for any leasebacks or other arrangements (cars, real estate, etc.) that your company has with you or family members.
 
- 4. Deduct any surplus staffing.  Are you carrying anyone on the payroll that could be eliminated by the new owner?
 
- 5. Cut out all extraordinary items: legal fees for a lawsuit that has already been settled, the accounting fees for updating your records to prepare the business for sale, extraordinary bad debt that was due to one bad customer in one year, extraordinary product development costs, large equipment purchases that were expensed up to the legal limit, etc.
 
There are so many items to be considered, it’s impossible to list them here.  But take the time to look at each item on your profit statement for an opportunity to recast.  Be sure to note your reasoning and list them to support your recast figures.
 
Also be sure to project future sales.  Remember this rule: the buyer is buying the future, not the past.  The past (all the recasting you just did) was done to support expectations for the future.  Project aggressive but reasonable sales increases that can be supported with a marketing plan.
 
Finish by subtracting your recast expense total from your projected sales figures.
 
The combination of recasting expenses and forecasting higher sales will have a dramatic impact on the value of your business.  Remember, at a multiplier of four times earnings, $25,000 in recast profit means a $100,000 increase in selling price.
About the author: James Laabs is an experienced business seller and author of the book The Business Sale System: Insider Secrets To Selling Any Small Business

This Article is copyright © 2006 Business Sale Center


 
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