Financial recasting is a critical process in business brokerage that transforms standard financial statements into documents that more accurately reflect a business’s true earning potential. When selling a business, owners typically run operations to minimize taxable income, resulting in financial statements that understate the company’s actual profitability. Recasting adjusts these statements by adding back owner benefits, one-time expenses, and non-essential costs that wouldn’t be transferred to a new owner.

The recasting process identifies several key adjustments, including owner’s compensation beyond market rate, personal expenses run through the business (vehicles, travel, insurance), one-time extraordinary expenses, and discretionary spending that isn’t essential to operations. By normalizing these figures, potential buyers can see what the business would look like under their ownership. This creates a clearer picture of the company’s Seller’s Discretionary Earnings (SDE) or Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) – the metrics most buyers use to determine valuation.

Professional business brokers play an essential role in the recasting process, applying industry standards while maintaining credibility. While the goal is to present the business in its best light, ethical recasting requires documentation and justification for every adjustment. Overly aggressive recasting can damage seller credibility and potentially derail deals when buyers conduct due diligence. The most successful brokers strike a balance between optimizing financial presentation and maintaining transparency.

Ultimately, proper financial recasting serves both buyers and sellers by creating a common financial language for negotiations. For sellers, it helps achieve fair market value by revealing the true cash flow available to new owners. For buyers, it provides standardized financial information that enables apples-to-apples comparisons between acquisition targets. When executed correctly, recasting transforms complex financial data into clear, actionable insights that facilitate smoother transactions and more accurate business valuations.