The short version
- Buyers price your company on earnings they can verify, usually two to three times yearly cash flow.
- Recasting adds back owner pay, personal costs and true one time expenses.
- Money from selling a truck or a loan is not earnings and should come out.
- Unreported cash cannot be added back, because nobody can prove it.
Why Recasting Matters
Most owners run some personal costs through the company and pay themselves in a way that suits their taxes.
That is normal, but it hides what the business really earns. Recasting adjusts the statement so a buyer sees the cash flow a new owner could expect.
At two to three times earnings, every dollar of real profit you can prove adds two or three dollars to the price.
Seller's Discretionary Earnings
For a company where the owner works full time, brokers usually start with net profit and add back the owner's salary, payroll taxes on that salary, health insurance and other benefits.
The result is seller's discretionary earnings, the cash one working owner could take home.
Larger companies with managers in place are priced on EBITDA instead. There, a fair salary for the person running the company stays in as a cost.
Add Backs Buyers Accept
- Depreciation and amortization, along with interest on loans the buyer will not take over
- Personal vehicle, phone or travel costs paid by the company
- Family members on payroll who do little or no work
- A true one time cost, such as a lawsuit settlement or a move to a new building
Each one needs a record. Buyers will ask for receipts, payroll reports or contracts, and an add back with nothing behind it tends to get thrown out.
Items That Come Out
Recasting works in both directions. Money that came in once, like the proceeds from selling equipment or the cash from a loan, is not operating income. Leaving it in inflates earnings, and a buyer will find it in the review.
Owner draws are another trap. Moving money from the company account to a personal one is not an expense on the statement, so it does not get added back on its own.
Rent on a Building You Own
If your company pays you rent below the market rate, a buyer will reset it to market, which lowers earnings. If it pays above market, the difference may be added back. Our guide on keeping your building when you sell the business goes further.
What Never Counts
Cash that never made it into the books cannot be proven, so it cannot be added back.
Owners who kept income off the return to save tax usually lose several times that amount in price. If this applies to you, start reporting fully now; buyers look at three years.
Line It Up With Your Filings
Buyers compare the recast statement with tax returns, bank deposits and sales tax filings. If they do not match, the buyer will want to know why. Read Virginia sales tax successor liability to see why your sales tax record matters too.
A broker will recast your numbers as part of an estimate. Industry notes are on the sectors and trades pages, and you can request a sale estimate at any time.