Valuation

Recasting Your Financial Statements Before Going to Market

Here's something most business owners don't realize until they're in a sale process: the financial statements you've been using for tax purposes are probably not the right financial statements for selling your business.

That's not a problem. It's actually an opportunity.

Why your tax financials understate your business value

Over the years, you've probably run some personal expenses through the company. A vehicle. A phone. Maybe some travel that was partly personal. You've paid yourself a salary — maybe above market, maybe below. You might have some family members on the payroll.

None of this is unusual and none of it is necessarily wrong. But it means your reported net income is lower than what the business actually earns as a standalone operation.

When you go to sell, buyers value the business on its true earning power — what it would produce for them as the new owner, not what it produced for you with your specific lifestyle and tax strategy built in.

What recasting looks like

Recasting means going back through your financials — typically the last two to three years — and identifying addbacks: expenses that a new owner wouldn't have, or that were personal rather than business in nature.

Common addbacks include owner's salary above market rate, personal expenses run through the business, one-time expenses like a lawsuit settlement or major repair, and family members on payroll above market rate.

The result is your adjusted EBITDA — the number that represents what the business truly earns for its owner.

What makes addbacks stick

Every addback needs to be documented. Bank statements. Receipts. Payroll records. A clear explanation of why each item was non-recurring or personal.

Buyers will challenge them. Their accountants will look at every line. The addbacks that hold up are the ones with paper behind them and a clean explanation.

The right way to approach this

Work with an experienced M&A advisor — not just your tax accountant — to recast your financials before you go to market. Your tax accountant's job is to minimize your taxable income. Your M&A advisor's job is to maximize your defensible valuation. Those are different jobs.

Done right, recasting can add hundreds of thousands of dollars to your final sale price.

We help business owners recast their financials as part of every engagement. Contact us to get started.

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