Sellers often provide the same financials to prospective buyers as they do to the IRS. But while this information might be accurate, it isn’t organized to demonstrate the true value of your business. Buyers want to be certain they are going to get a return on their investment. Recasting is an often misunderstood but important step that helps present your profits in the best possible light.
What Is Recasting?
Financial statements are prepared to benefit an operating business, not aid a business sale. Think about what your accountant looks for when preparing your tax return. In order to minimize your tax liability, there is a strong incentive for your CPA to include all possible expenses. Everything from writing off the cost of a personal vehicle to pumping profits back into the business in the form of capital improvements can be legitimate ways to lower taxes, but can wreak havoc on your profit and loss statement.
Recasting takes the same financial information, but presents it with a focus on the financial benefit of owning your business. It’s a complex process that involves everything from adjusting owner salary to removing any assets or debts that won’t be assumed by a buyer. But the result should be simple: a bare bones version of your financials that is easy for a potential buyer to understand.
Why Is It Important to Buyers?
Before realtors show a home to prospective home buyers, they recommend that the current owner remove clutter and paint the walls a neutral tone. It’s not because all buyers are neat freaks who like white walls. It’s because, when you remove distractions from a home (or a business), true potential becomes more apparent.
Stripping down your financials with a recast allows buyers to do two things:
First, it lets them begin envisioning their own future rather than your past. When your personal and one-time costs are removed, limousine business investors can gain a clearer idea of what they can expect in terms of cash flow.
Second, recasting allows buyers to easily compare your business with other potential investments. If your financials are focused on downplaying cash flow, while another seller’s financials play it up, it’s like comparing apples to oranges – and the other seller’s fruit might appear sweeter.
Just like the process of valuation, the process of recasting financials will be different for every industry and every business. From owner’s discretionary earnings to personal loans, many of the perks you enjoy – but that have little to do with your actual profits – can be removed to boost your bottom line. However, this has to be done honestly and accurately. A professional intermediary specializing in the luxury transportation industry can help you accomplish the tricky task of creating a recast that effectively represents the true financial benefit of owning your business.