When preparing a business for sale, knowing when to recast financials is crucial for maximizing value and attracting buyers.

When to Recast Financials in Preparation for a Sale

In the competitive landscape of business sales, the importance of accurate and appealing financials cannot be overstated. This blog post dives deep into the intricate process of recasting financial statements, highlighting when and why business owners should consider this critical step. By understanding the nuances of financial recasting, business sellers can present a more accurate picture of their business, enhance perceived value, and ultimately improve their chances of a successful sale.

Introduction

Selling a business is rarely a straightforward process. It involves numerous considerations, not the least of which are the financial statements that potential buyers will scrutinize. When preparing for a sale, it’s essential to position your business favorably, and one way to achieve this is through recasting financials. Recasting financial statements allows sellers to present a clearer, more realistic view of their company’s financial health. This not only aids in establishing a fair market price but also builds trust with potential buyers. In this article, we’ll explore the key aspects of recasting financials, including the timing, benefits, and best practices to ensure you’re fully prepared for a successful sale.

Understanding Financial Recasting

• Financial recasting is the process of adjusting a business’s financial statements to reflect a more accurate operating performance. Typically, this involves removing non-recurring expenses, adjusting for owner compensation, and other discretionary expenses that may not accurately represent the ongoing operations of the business.

• The goal is to provide a clearer view of the company’s potential profitability. According to the International Business Brokers Association, well-recast financials can lead to businesses selling for 20-30% more than those with unadjusted financials.

• For instance, if a business owner has included personal expenses, such as a car lease or family vacation costs, in the business’s financials, these costs need to be removed or adjusted. This gives potential buyers a better understanding of the true profitability of the business.

When to Recast Financials

• The ideal time to recast financials is before putting the business on the market. Many sellers make the mistake of waiting until they receive an offer to present adjusted financials, which can lead to last-minute complications and misunderstandings.

• Ideally, recasting should be done at least 6-12 months before the sale. This allows for any potential issues to be addressed and ensures that financials reflect the most recent and relevant data.

• For example, if a business experienced a temporary dip in revenue due to unforeseen circumstances, recasting could help illustrate that this dip was not indicative of long-term performance but rather a short-term anomaly.

Benefits of Recasting Financials

• One of the primary benefits of recasting financials is the potential increase in sale price. Buyers are often willing to pay a premium for businesses that present a clear and realistic financial picture.

• Recast financials also establish credibility. By providing transparent and adjusted financials, sellers can build trust with potential buyers, making them more inclined to proceed with negotiations.

• Additionally, recasting can highlight the business’s strengths. For instance, if a business has strong EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) but has been hindered by one-off expenses, these can be adjusted to showcase the true earning potential to buyers.

Best Practices for Recasting Financials

• Engage a Professional: While business owners can attempt to recast their financials themselves, working with a financial advisor or a business broker experienced in financial recasting is highly advisable. They can provide insights and ensure that all adjustments are in line with industry standards.

• Document Everything: Maintain clear records of all changes made during the recasting process. This documentation is crucial for justifying adjustments to potential buyers and for maintaining transparency throughout the sale process.

• Keep it Simple: While it’s essential to provide a detailed view of the business’s performance, complexity can overwhelm potential buyers. Ensure that the recast financials are presented in a straightforward and easy-to-understand format.

• Regular Updates: If the business is on the market for an extended period, it’s vital to keep the financials updated. Regular recasting may be necessary to reflect any changes in business performance or market conditions.

Comparative Analysis: Recasting vs. Traditional Financial Reporting

• Traditional financial reporting provides a snapshot of a business’s financial health based on historical data, often including various personal and non-recurring expenses. Recasting, however, focuses on the ongoing operations and profitability potential.

• By comparing traditional financial reports with recast statements, business owners can better illustrate the difference between the actual operating performance and what is depicted in standard financial statements.

• For example, a business that shows a substantial loss on its traditional income statement may actually be quite profitable when recast to exclude personal expenses and one-time costs.

Implementing Financial Recasting: A Step-by-Step Guide

1. Gather Financial Statements: Collect historical financial statements, including income statements, balance sheets, and cash flow statements for at least the past three years.

2. Identify Non-Recurring Expenses: Work through the financial statements to identify any one-off expenses or non-essential costs that can be removed or adjusted.

3. Adjust Owner Compensation: If the owner’s salary or perks are above market rates, consider adjusting these to reflect a more reasonable compensation package for a buyer.

4. Review Industry Benchmarks: Compare adjusted financials against industry benchmarks to provide context for the business’s performance and ensure that the recast remains competitive.

5. Prepare a Summary Document: Create a detailed summary that outlines all adjustments made during the recasting process, providing clarity to potential buyers.

Final Considerations Before Selling

• Before entering the market, ensure that all financials, both traditional and recast, are accurately represented. This dual approach not only shows the business’s past performance but also its potential trajectory, making it more attractive to buyers.

• As the business goes through the sale process, be prepared for due diligence. Buyers will scrutinize all financials presented, and any discrepancies between the recast and traditional statements can raise red flags.

• Keep communication open with potential buyers. Transparency during the recasting process can help maintain trust and facilitate smoother negotiations.

Conclusion

In summary, recasting financials is an essential step in preparing a business for sale. By presenting a clear and adjusted view of financial performance, sellers can enhance their business’s appeal and potentially increase its sale price. Engaging professionals, documenting changes, and maintaining transparency throughout the process are vital to a successful sale. As you consider selling your business, taking the time to recast financials can make a significant difference in attracting the right buyer and achieving your financial goals. Remember, the right preparation today can lead to greater rewards tomorrow. If you’re considering selling your business, start the process now and explore how you can maximize your sale potential.