What Is Recasting Financials and Why Does It Matter When Selling?

When you run your own business, it’s common, and perfectly legal, to run personal expenses through the company, pay yourself a below-market salary, or carry costs that wouldn’t exist under new ownership. When it comes time to sell, these items need to be identified and added back to show what the business actually earns. That process is called recasting, and it can significantly increase the value of your business.

What Does Recasting Mean?

Recasting, also called normalizing or restating, is the process of adjusting your financial statements to reflect the true economic earnings of the business as it would operate under typical ownership conditions. The goal is to calculate Seller’s Discretionary Earnings (SDE), which is the most commonly used metric for valuing small businesses.

SDE starts with your net income and adds back:

• Your owner’s salary and compensation
• Personal expenses run through the business (vehicle, phone, travel, health insurance, life insurance)
• One-time or non-recurring expenses (legal settlement, equipment purchase, flood damage, etc.)
• Depreciation and amortization
• Interest expense
• Any above-market rent paid to a related party
• Non-cash expenses

Why Recasting Matters So Much

Since most small businesses are valued as a multiple of SDE (typically 2x to 4x), every dollar you can legitimately add back to SDE increases the value of your business by that multiple.

Example: If your business shows $150,000 in net income on paper but you have $80,000 in legitimate add-backs, your recast SDE is $230,000. At a 3x multiple, that’s the difference between a $450,000 valuation and a $690,000 valuation, a $240,000 difference in asking price.

Common Add-Back Items

Owner Compensation

If you pay yourself $120,000 per year as the owner, that salary is added back to SDE, because the buyer will replace you and pay themselves from the earnings. This is the largest add-back in most small business sales.

Personal Expenses

Personal vehicle costs, cell phones, personal travel, owner health and life insurance premiums, and similar items that wouldn’t continue under new ownership are legitimate add-backs. These need to be documented and supported with evidence.

One-Time Events

If you had a legal expense, equipment replacement, or other unusual cost in a particular year, it can be added back if it truly was a one-time, non-recurring event. Buyers will scrutinize these carefully.

Family Member Salaries

If you pay a family member above or below market rate, the difference can be normalized. If your spouse is on payroll at $80,000 but the role would cost $40,000 to replace, the $40,000 difference is an add-back.

What Buyers Will Challenge

Not every add-back will be accepted without scrutiny. Buyers and their advisors will question:

• Add-backs without supporting documentation
• “One-time” expenses that appear in multiple years
• Inflated personal expense add-backs that seem disproportionate
• Revenue or income that can’t be verified in bank statements

The key is to only add back legitimate, documentable items, and be prepared to defend every one of them with receipts, bank records, or tax documentation.

Getting Help With Recast Financials

Preparing a professional recast income statement is one of the first things I do with sellers before listing a business. Done correctly, it presents your business in the most favorable, and defensible, light to buyers and their lenders.

If you’re selling a business in St. Augustine or Northeast Florida, let’s talk about what your recast earnings look like and how they translate to a valuation.

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Related Reading

• Should I Use a Business Broker to Sell My Business in St. Augustine?
• Should I Use a Business Broker to Sell My St. Augustine Business?
• How to Increase the Value of Your Business Before You Sell

• Category: Selling a Business