How
To Recast Your 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, 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 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 recast financial statements that doesn't mean they
will agree with every item on your recast financials. 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.
If
you have a question about recasting or any aspect of selling
your business please feel free to contact me by e-mail at: pat@thebizseller.com
I'll do my best to get back to you with my input ASAP.
Thank
you,
Pat
Jennings
TheBizSeller.com
- Online
since 1999
pat@TheBizSeller.com
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