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1- Prepare To Sell Your Business
To Recast Your Financial Statements So That You Can
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
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 employee.
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 sale
all debts that will not be assumed by the buyer
all damaged, obsolete and slow-moving inventory and
value the remaining inventory at replacement cost
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.
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" may differ
- this is an example of the type of things you may have
to negotiate with the buyer.
Value To Your Business By Preparing Your Lease, Contracts,
Assets And Inventory