Maximizing Your Sale Price: Should You Recast Your Financials Before Selling Your Company?

To show financial statements being recast

For business owners contemplating the sale of their company, the process can be both exhilarating and daunting. Amidst the myriad of considerations, one crucial decision often emerges: whether to recast financial statements before putting the business on the market. This involves adjusting the company’s financial statements to reflect its true earning potential by removing one-time expenses, non-recurring revenues, or owner benefits that may not be relevant to a potential buyer.

The decision to recast financials before a sale requires a nuanced understanding of both the company’s financial history and the expectations of prospective buyers. While recasting can potentially enhance the perceived value of the business and attract more buyers, it also comes with risks and complexities that demand careful evaluation.

In this article, we delve into the considerations that business owners must weigh when contemplating whether to recast their financial statements before selling their company. By understanding the advantages, drawbacks, and implications of financial recasting, entrepreneurs can make informed decisions that maximize their sale price and facilitate a smooth transition of ownership.

Reasons to Recast

Business owners may consider obtaining recast financials before selling their company, a step that holds significant importance in faithfully portraying the genuine financial performance and prospects of the business. Recasting entails modifying historical financial statements to provide a more precise depiction of the company’s earning capacity. Here are several reasons why business owners might choose to recast their financial statements:

Normalization of Expenses:

Recasting allows for the normalization of non-recurring or extraordinary expenses. By excluding one-time costs or expenses related to events that won’t occur after the sale, the recasted financials provide a clearer view of the company’s ongoing operating performance.

Owner’s Discretionary Expenses:

Business owners may find that certain personal or discretionary expenses are incorporated into the financial statements. Recasting aids in adjusting these expenses to mirror the genuine operational costs and profitability of the business, thereby furnishing potential buyers with a more precise representation.

Non-Operating Items:

Certain non-operating items, such as gains or losses from the sale of assets, may distort the historical financial performance. Recasting adjusts for these items to provide a more consistent view of the company’s core operations.

Adjustment for Changes in Accounting Policies:

Changes in accounting policies can impact the comparability of financial statements over time. Recasting helps adjust for such changes, ensuring that the financials are presented in a consistent manner.

Owner’s Compensation:

Business owners might pay themselves salaries or benefits that are higher or lower than market rates. Recasting can adjust the owner’s compensation to reflect a more typical or market-appropriate level, providing a clearer picture of the company’s profitability.

Related Party Transactions:

If the company engages in transactions with related parties, such as affiliates or family members, recasting helps adjust these transactions to market terms, eliminating any distortions in the financial statements.

Lease Adjustments:

Recasting may involve adjustments for lease expenses, especially if the business owns its property or has lease agreements with terms that significantly deviate from market rates.

Working Capital Adjustments:

Recasting may include adjustments for working capital items to reflect the optimal level of working capital required to operate the business efficiently. This ensures that the buyer understands the working capital needs of the business.

Pro Forma Financial Statements:

Recasting often results in the creation of pro forma financial statements, which project how the financials would have looked if the adjustments had been in place historically. This helps potential buyers assess the future earnings potential of the company.

Risks to Recasting

While recasting financials before selling a company can offer enticing benefits, it’s essential for business owners to be aware of the potential risks involved. One significant risk is the potential for misrepresentation. Recasting involves adjustments to financial statements, which, if not carefully executed, could inadvertently distort the true financial health of the business. Buyers rely heavily on financial data to make informed decisions, and any misrepresentation could lead to distrust and even legal repercussions.

Moreover, there’s the risk of skepticism from potential buyers. Some buyers may view recasting with suspicion, questioning the motivations behind the adjustments and the accuracy of the presented financial information. This skepticism can lead to prolonged negotiations, increased due diligence demands, or even deter potential buyers altogether.

Additionally, if discrepancies between the recasted financials and the actual financial performance are uncovered during the due diligence process, it could undermine the credibility of the seller and jeopardize the entire sale process. Therefore, while recasting financials can be advantageous, it’s crucial for business owners to proceed with caution and transparency to mitigate these risks effectively.

To Recast or Not to Recast?

The decision to recast a company’s financial statements, hinges on a variety of factors and business owners should consider employing the assistance of professional advisors. An M&A advisor plays a crucial role in assisting business owners in determining whether recasting financials is necessary before selling their company.

With their expertise in mergers and acquisitions, these advisors thoroughly analyze the company’s financial statements, historical performance, and market dynamics to assess the potential impact of recasting. They can provide valuable insights into the expectations of potential buyers and the prevailing market trends, helping business owners weigh the benefits and risks of recasting accurately.

Additionally, M&A advisors can offer guidance on the most effective recasting strategies to enhance the company’s perceived value and maximize its sale price. By leveraging their experience and market knowledge, M&A advisors empower business owners to make informed decisions that align with their objectives and optimize the outcome of the sale process.

To learn more about how your company’s value can be impacted by recasting your financials, visit the seasoned professionals at Final Ascent today!