When selling a business, accurately presenting its profitability is key to maximizing value for potential buyers. One way to do this is through recasting financial statements. Recasting involves adjusting the financials to reflect the true economic benefit a new owner would receive by removing any discretionary, one-time, or personal expenses that won’t be carried over in the sale.
What is Recasting?
Recasting is the process of adjusting financial statements to give a more accurate picture of a company’s profitability. This includes removing non-essential expenses, such as personal or family costs, inflated salaries, and other discretionary spending that would not continue under new ownership. For example, expenses like a family member’s cell phone bill, or a salary paid to someone who does not actively work in the business, are commonly recast.
By eliminating these unnecessary costs, business owners can show potential buyers a clearer view of the company’s earnings. Business valuation services often rely on recasting to provide more reliable financial data, which can directly affect the sale price.
Why Recasting is Essential for Business Valuation
For anyone selling a business, recasting is crucial to business valuation services. The goal is to provide potential buyers with a clean and accurate profit outlook. Buyers want to know what the business will look like under their control, free from any expenses unrelated to operations. A business growth advisor can guide you through this process, ensuring the numbers reflect the actual profitability potential.
Recasting can involve removing costs like personal vehicles or inflated executive salaries, ensuring only genuine, necessary business expenses remain. This gives buyers confidence in the accuracy of the profit data and enhances the business’s appeal.
Industry Practices for Recasting
There are industry standards when it comes to recasting, and it’s essential to follow them closely. It’s important not to estimate but to use actual expenses, down to the penny, when removing items from the financials. For example, if you’re recasting a family member’s cell phone bill, take the exact amount spent and add it back to the profit.
This transparency builds credibility with potential buyers and enhances their trust in the financials. When handled properly, recasting not only helps with business valuation services, but also creates a clearer path for negotiations and eventual sale.
The Role of a Business Growth Consultant
A business growth consultant can help navigate the complexities of recasting, ensuring accuracy and adherence to best practices. They play a vital role in preparing a business for sale by maximizing profitability through strategic expense adjustments. Having an expert on board is especially important if you’re not familiar with the nuances of financial recasting or business valuation. This level of preparation can make a significant difference in the business’s perceived value.
Ensure your financials reflect the true value of your company by working with our experienced team. At Duran Advisors, we offer expert business valuation services, and our seasoned business growth consultants can guide you through every step. Contact us today for a consultation and take the first step toward a successful sale!