What are Recast Financials?
The Short Answer
Recast Financials explained simply
When you sell a business, its financial statements often include expenses that are personal to the current owner or one-time costs that won't continue after the sale. Recasting financials means adjusting these statements to remove those items. The goal is to present a clear picture of the business's actual operating performance, making it easier for potential buyers and lenders to assess its value and profitability.
Real-World Example
The Coffee Shop Recast
Imagine a coffee shop owner who pays their spouse a salary for minimal work, uses the business account for personal car payments, and recently had a one-time expense to repair a broken espresso machine. \n\nOriginal P&L:*\n Revenue: $300,000\n Expenses: $250,000 (includes $30,000 spouse salary, $10,000 car payment, $5,000 espresso repair)\n Net Profit: $50,000\n\nRecast Adjustments:\n Add back spouse salary: +$30,000\n Add back car payment: +$10,000\n* Add back espresso repair: +$5,000\n\nRecast P&L:*\n Revenue: $300,000\n Adjusted Expenses: $205,000\n Adjusted Net Profit (SDE): $95,000\n\nThis recast shows the business is much more profitable than the original statements suggested, making it more attractive to a buyer.
Why this matters
Recasting financials is crucial because it helps buyers see the real earning potential of a business. Without these adjustments, a business might appear less profitable than it truly is, leading to a lower valuation. It also helps lenders understand the business's ability to repay a loan, which is important for financing a sale.
Always have your financials recast by a professional. It adds credibility and ensures all adjustments are properly documented, which is key for a smooth sale.
Always have your financials recast by a professional. It adds credibility and ensures all adjustments are properly documented, which is key for a smooth sale.
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