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If you are in search of an existing business opportunity, it is important to understanding the meaning

of recasting financial statements. Most professionals/business brokers presenting a business for sale

will have this process completed prior to offering the business for sale. Most likely you inquired

about a business listing and recast financial statements are included with the confidential business

information.

The financial recast shows the true earnings of the business. “The true earnings of the business” has

several names in the business brokerage industry of which the most common are: Net Owner Benefit

(NOB), Seller Discretionary Earnings (SDE).

Definition: Financial statements of the business that are adjusted to reflect the actual financial benefits

of business ownership.

What It Means: Most small businesses are managed and the financials completed to minimize taxable

income for the owner. It is often necessary to make adjustments to the reported financial statements in

order to express the actual cash flow benefits available to the owner.

Seller – Prepares financials to minimize taxes.

Buyer – Wants to know, “How much can I make if I own the Business?”

Solution – Recasting financials

• Adjust cost of goods to historic averages. It is possible that the business has been using lower cost inventory that may not continue in the future.
• Adjust owner’s salary to a market rate.
• Review and adjust salaries of family members to market rates, if they work in the business.
• Review and adjust depreciation expense consistent with the expected useful life of the underlying assets.
• Adjust the business rent to a fair market rate. If the business owns its real estate premises, include a fair market rent as a business expense.
• Adjust expenses that are incurred at owner’s discretion. Examples are some travel and entertainment, vehicles, memberships, bonus payouts and others.
• Factor out any one-time expenses that are unlikely to occur in the future. In the professional business appraisal literature the process of recasting the financials is often referred as reconstruction or normalization.

• Accounts receivable. Review an accounts receivable aging report and remove uncollectible accounts, taking them as a bad debt expense.
• Inventory that is not good and sellable. Inventory that has become damaged or obsolete should be adjusted out.
• Prepaid expenses should be adjusted out if they do not remain with the buyer after the business purchase.
• Cash and cash equivalents are typically retained by the seller. Adjust the balance sheet to have the amount of cash required for running the business.
• Remove any amounts due from shareholders as assets or due shareholders as liabilities.
• Book value of assets. The seller’s balance sheet may not show fair market value of items owned by the company.  Recasting the balance sheet shows a potential buyer the true value of the items included in the purchase.  Buyer tax advantages are available in the case of higher basis for asset depreciation.
• Real estate owned by the business needs to be removed if it is not part of the business purchase.
• Carefully review such intangible assets as business goodwill to determine if they should be adjusted.
• Accounts payable. Determine if some liabilities have been accumulated without being paid. If so, they must be added to the balance sheet.