Business Valuations for Sellers
The Benefits of Financial Recasting
Most privately held businesses keep track of their financial performance by means of balance sheets, P&Ls, and Tax Returns. This type of reporting is essential in a business operation but it is not beneficial in defining the real fair market value of a business and its true financial performance. Buyers buy cash flow! Prospective buyers need to know the health of a business, how the money is being spent and the operation's capacity to generate positive cash flow. Traditional financial reporting seeks to minimize business tax liability which in turn, results in the inaccurate presentation of a company's true earnings and profitability.
The process of recasting financial statements is integral in identifying the fair market value of a business when the owner's intentions are to sell. Recasting requires extensive investigation to ensure all relevant and appropriate adjustments are correctly reported. The objective is to examine a company's balance sheet and profit and loss to expose the real performance of the company, which in most cases greatly enhances the fair market value of the business.
A business owner's salary, commissions, perks, incentives, personal loans and discretionary expenses are all key areas that are examined when recasting financial statements. Such owner benefits are to be "added back" into the “pre-normalized” performance of the company so that a future buyer can adequately assess the business, its cash flow, and future earning capacity. Additional areas of interest, such as included/excluded assets & liabilities as well as fair market value of tangible assets will be examined with the business owner, in an effort to correctly determine the fair market value of the business.
To learn more about financial recasting in the business valuation process, please contact us today or call us at 877-VALU-BIZ.