Sell
Your Business Tips, Hints & Techniques:
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your name & e-mail address below and each week I'll send you
detailed tips, facts, resources & ideas you can use right
away to help sell your business faster and for more money.
Step
1 - Preparation
How
To Recast Financial Statements
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.
Sell
Your Business Tips, Hints & Techniques:
Enter
your name & e-mail address below and each week I'll send
you detailed tips, facts, resources & ideas you can use
right away to help sell your business faster and for more
money.
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
