Step 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 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 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
To Recast Your Balance Sheet
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