1- Prepare To Sell Your Business
To Recast Your Financial Statements To Maximize The
Value Of Your Business
you are like most owners, you have run your business
in a way that minimizes taxes. Maybe you have kept
a family member on the payroll at an overly generous
salary or had the company make the lease payments
on your luxury vehicle.
perks and benefits you've received from your business
are all of real value but have been deducted
from profits before figuring taxes.
however, you need to demonstrate to your buyer
the true value the business generates for it's owner.
a set of recast financial statements are the
way you add the value of all these benefits
back into your financial statements.
list of expenses that may be recast can be quite long
and will vary from one business to another. Here is
a list of the most common expenses from the income
statement that may need to be recast.
Salary: Deduct from expenses the owners
salary and bonuses. Plus, deduct all expenses
associated with the owners perks - auto lease,
insurance, retirement plans, profit sharing.
Add back onto the income statement a reasonable
salary to pay for a manager to replace you.
Salaries: Deduct the salaries of any family
members who are on the payroll but will not remain
after the sale. If the family member actually
did enough work that they will need to be replaced,
add back in a reasonable salary for a replacement
Time Expenses & Revenue: Deduct any one-time
expenses that the new owner will not need to pay
such as unusually large (and one time only) equipment
purchases or legal fees associated with a lawsuit
that has been settled. Also, be sure to deduct
from your expenses any costs associated with preparing
your business for sale. To make your recast statements
accurate, you will also have to deduct from revenue
any one time payments such as proceeds for an
insurance claim or the sale of real estate.
Deduct interest payments on any business loans
you will pay off.
To Recast Your Balance Sheet
addition to your income statement you will need
to recast your most recent Balance Sheet
all assets that are not to be included in the
all debts that will not be assumed by the buyer
all damaged, obsolete and slow-moving inventory
and value the remaining inventory at replacement
off all accounts receivable that you know to be
your accountant should go over your income statement
and balance sheet looking for any and all items
that can legitimately be recast. It's okay to be
aggressive with your recasting. If the buyer
has owned a business before, he will understand
what you are doing - he probably did the exact
same thing with his business.
take the time to note your reasoning for each recast
item so you can make a convincing case to
the buyer. While buyers understand the need for
recasting financial statements that doesn't mean
they will agree with every item you recast. Be prepared
to compromise and/or negotiate on some things.
example, we've talked about adding back in a reasonable
salary to hire a manager to replace you. How you
and the buyer each define "reasonable"
- this is an example of the type of things you may
have to negotiate with the buyer.
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