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Step 1- Prepare To Sell Your Business

How To Recast Your Financial Statements To Maximize The Value Of Your Business


If 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.

The perks and benefits you've received from your business are all of real value but have been deducted from profits before figuring taxes.

Now, however, you need to demonstrate to your buyer the true value the business generates for it's owner.

Creating a set of recast financial statements are the way you add the value of all these benefits back into your financial statements.


Recast Income Statements

The 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.

  • Owners 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.

  • Other 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 employee.

  • One 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.

  • Interest: Deduct interest payments on any business loans you will pay off.


How To Recast Your Balance Sheet

In addition to your income statement you will need to recast your most recent Balance Sheet

  • Remove all assets that are not to be included in the sale
  • Remove all debts that will not be assumed by the buyer
  • Remove all damaged, obsolete and slow-moving inventory and value the remaining inventory at replacement cost
  • Write off all accounts receivable that you know to be uncollectable

You and 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.

But 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.

For 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" may differ - this is an example of the type of things you may have to negotiate with the buyer.


NEXT: Add Value To Your Business By Preparing Your Lease, Contracts, Assets And Inventory



The Six Steps To Selling Your Business
Step 1 - Preparation  Step 2 - Valuation   Step 3 - Finding Buyers
Step 4 - Structure The Sale  Step 5 - Due Diligence  Step 6 - Closing






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