Recasting Financial Statements and Your True Business Valuation

By Generational Equity


Recently, you made the biggest and most difficult decision in your career; you decided to exit your business. More than that, you decided to sell to a professional business buyer.

We understand this probably wasn’t an easy choice. You might have entertained the idea of passing your company to your children or trusted employees. But, as our team at Generational Equity makes clear at our executive conferences, the best way to secure the long-term legacy of your business (and your financial future) is selling to a committed buyer who can take your company to the next level.

But, now you’ve made that tough decision, it’s time to establish your true business valuation and growth potential. Of course, you want to attract the maximum bid for the hard work, time and money you put into your company. But, achieving that optimal return doesn’t happen overnight.

That’s why we recommend your first step is to recast your company’s financials. Like most business owners, you may have under-reported earnings to reduce taxes over the years. This is perfectly legal and par for the course. But when the time comes to exit, this means you might misjudge the true value of your company. By recasting financial statements, you show buyers the true profitability of your business.

What is Recasting?

Here is how Investopedia defines recasting of earnings:

“The act of amending and re-releasing a previously released earnings statement, with specified intent.”

In practice, this is where an expert will cast a keen eye over your company’s financials in recent years to reinsert any earnings or expenses along the way. This will help establish your true business value. Don’t confuse this for manipulating your finances to mislead potential buyers – their detailed due diligence process will uncover any attempts at this.

Instead, recasting will reexamine your finances to provide an accurate and promising picture to buyers. Don’t forget – they are interested in your business’s potential growth under their direction. So, it is important to ensure you aren’t selling this short by recasting (normalizing) your financial statements.

Examples of Financial Recasting

Let’s apply this approach to a company’s EBITDA (earnings before interest, taxes, depreciation and amortization). As we have highlighted in past pieces, EBITDA is used by buyers as a gauge of business worth. Using this number allows them to compare several investment opportunities and determine which is the most promising.

Many aspects included in EBITDA can be recast for a more accurate picture of your company’s value. These include:

  • Revenue/expenses from unnecessary assets – for instance, if you annually rent a country house for a company retreat, this is an expense that may not be picked up by a buyer. So, this can be added back to your business’ income statement.
  • Owner salaries/bonuses – these will likely be greater than other employees, but will not be costs that a new owner must follow.
  • One-time fees – if you spent money on a legal dispute or a one-time marketing campaign, these are not ongoing costs that a buyer would have to take on, so can safely be added back to EBITDA.
  • Non-arms-length revenue/expenses – these are transactions where your company pays more or less than market rates, such as rent when the building is personally owned by one of the partners. These can and should be normalized to reflect their correct market value.

This is just a small sample of the financials you should analyze and recast to establish the true value of your business. Without this, you risk undervaluing or overvaluing your business when heading into market – either way, you won’t get the price you deserve for your dedication to your enterprise. Recasting your statements will take some time and effort (especially if you don’t use the guidance of a professional M&A advisor), but this is time well spent to ensure a precise valuation.

It is important to seek the support of a professional M&A firm to get an accurate company valuation. This is where our skilled advisors at Generational Equity can help. Not only will we provide a comprehensive account of what price your business would command in market, but we’ll also discuss techniques to increase that value over time AND place your company in front of the right buyers.

If you’d like to learn more about the importance of recasting and how our team values a company, you should attend one of our executive conferences. These are completely complimentary (apart from a few short hours of your time) and provide a detailed analysis of the M&A process, giving you the perfect launching pad to confidently exit your business.

Find out when we’re in your area and together we’ll create a legacy that will last for generations.