Five Steps To Take Before Listing Your Business For Sale
You’ve built a successful green industry business over the years. Maybe you’re thinking about selling it someday. Or perhaps someone has approached you about buying your company.
When that time comes, you’ll hear the term “financial recast.” If you’re like most business owners, this phrase might confuse you. What does it mean? Why would you need to change your financial statements? And how does it affect your business value?
Let’s break this down in simple terms. Understanding financial recasts can mean the difference between selling your business for what it’s truly worth or leaving money on the table.
Since SpringGreen was established in 1977, we’ve seen many green industry owners go through the acquisition process. Today, with 150 franchise partners across the USA, we understand the financial side of buying and selling green industry businesses. This knowledge helps our partners make smart decisions about their financial future.
What Is a Financial Recast?
Simply put, a financial recast restructures your financial statements to give buyers a clearer picture of your business performance. It shows how your business will actually perform when it changes hands.
Think of it this way. Your current financial statements show every income and expense exactly as you reported them for tax purposes. While this works great for filing taxes, it can create a false impression of your company’s true earning power when you’re trying to sell.
Most business owners work with their accountants to legally minimize their tax bills. They run personal expenses through the business. They pay themselves higher salaries. They make charitable donations. All of this reduces their taxable income, which saves money on taxes.
But when it’s time to sell, these same tax-saving strategies make your business look less profitable than it really is. A financial recast removes or adjusts items on your financial statements that don’t relate to ongoing business operations. This shows the true profitability of your business.
Why Do You Need a Financial Recast?
The main reason is simple: it can dramatically increase your business value. Here’s why this matters so much.
When buyers look at businesses to purchase, they use your earnings to determine how much they’ll pay. They typically use a formula called EBITDA – earnings before interest, taxes, depreciation, and amortization. The higher your EBITDA, the more they’ll offer for your business.
If a buyer is willing to pay 5 times your EBITDA for your business, then every dollar you add back through recasting translates to $5 more in sale price. Add back $50,000 in legitimate expenses, and you could increase your sale price by $250,000.
But there’s another important reason. Smart buyers will do their own version of recasting when they look at your business. They’ll spot the personal expenses and one-time costs that won’t apply to them. If you don’t present recast financials, they might offer you a price based on your lower, non-recast numbers while knowing the business is actually worth much more.
What Gets Adjusted in a Financial Recast?
Financial recasts typically adjust several types of expenses and income. Here are the most common ones:
Owner Salary and Benefits Your salary gets added back because a new owner might pay themselves differently. If you pay yourself $120,000 a year, but the job could be done by someone making $60,000, that $60,000 difference gets added back to show the true earning potential.
Personal Expenses Run Through the Business Many business owners pay for personal items through their company. This might include family cell phone plans, personal vehicle expenses, family members on payroll who don’t really work in the business, or travel that’s partly personal. All of these get removed because they won’t apply to a new owner.
One-Time or Unusual Expenses Things that happened once and won’t happen again get removed. This could include legal fees for a specific lawsuit, equipment replacement after a fire, moving expenses when you relocated, or major repairs that won’t be needed again.
Above-Market Rent If you own your building and pay yourself high rent, or if you rent from a family member at above-market rates, this gets adjusted to show what fair market rent would be.
Discretionary Expenses Items like charitable donations, excessive entertainment expenses, or premium insurance that a new owner might not choose get adjusted out.
How the Recast Process Works
The financial recast process typically follows these steps:
Step 1: Gather Financial Information Start with your tax returns and financial statements for the past 3-5 years. These provide the baseline numbers for the recast.
Step 2: Identify Adjustments Go through each expense line by line to identify items that should be added back. This requires detailed knowledge of what expenses are personal, one-time, or discretionary.
Step 3: Document Everything Every adjustment must be documented and supported. You need to show exactly where the expense was recorded and why it should be adjusted.
Step 4: Create the Recast Statements The recast statements show three columns: your original numbers, the adjustments, and the new recast numbers that reflect true business profitability.
Step 5: Present to Buyers The recast statements are presented to potential buyers along with detailed explanations of each adjustment.
Who Should Perform a Financial Recast?
This is a critical decision. Most experts recommend hiring a professional rather than trying to do it yourself. Here’s why:
Accountants with M&A Experience Your regular accountant might not have experience with recasting for business sales. You need someone who understands what buyers will accept and how to present adjustments credibly.
M&A Advisors Merger and acquisition advisors do recasts regularly. They know what buyers look for and how to maximize legitimate adjustments without losing credibility.
Business Brokers Experienced business brokers understand recasting and can either do it themselves or work with qualified accountants.
The key is working with someone who has done this before. Buyers give more weight and credibility to adjustments made by qualified third parties than by business owners themselves.
Benefits of Financial Recasting
When done properly, financial recasting offers several important benefits:
Higher Business Valuation The most obvious benefit is a potentially higher sale price. By showing your true earning power, you can justify a higher asking price and attract better offers.
Attracts More Buyers Recast financials make your business easier to compare with other investment opportunities. This can attract more qualified buyers and create competition for your business.
Faster Due Diligence When your financials clearly show adjustments upfront, the buyer’s due diligence process goes smoother. There are fewer surprises and less back-and-forth negotiation.
Better Financing Banks and lenders use recast financials to determine how much they’ll lend to buyers. Higher recast earnings can mean better financing options for potential buyers.
Limitations and Considerations
Financial recasting isn’t magic. There are important limitations to understand:
Must Be Legitimate Every adjustment must be real and supportable. You can’t just add back expenses because you want a higher valuation. Buyers will verify adjustments and may reject ones that seem questionable.
Takes Time and Costs Money Proper recasting requires detailed analysis of several years of financial records. This process takes time and usually requires paying professional fees.
Buyer Acceptance Varies Different buyers have different comfort levels with recast adjustments. Some accept more aggressive recasts while others are more conservative.
Quality of Records Matters If your financial records are messy or incomplete, recasting becomes much more difficult and less credible.
When Do You Need a Financial Recast?
You might need a financial recast in several situations:
Selling Your Business This is the most common reason. If you’re planning to sell, a recast can help you get the best possible price.
Seeking Investment If you want to bring in investors or partners, recast financials can show them the true profit potential of your business.
Getting a Loan Banks sometimes want to see recast financials to understand your business’s true cash flow and ability to repay loans.
Buying Out a Partner If you need to buy out a business partner, recast financials help establish fair value for their share.
Planning for the Future Even if you’re not selling soon, understanding your recast financials helps you know what your business is really worth.
Making Smart Financial Decisions
Understanding financial recasts is just one part of making smart decisions about your business’s financial future. Whether you’re considering selling, bringing in partners, or just wanting to understand your true business value, recast financials provide clarity.
For green industry business owners, this knowledge is especially valuable. The recurring revenue nature of lawn care services, the seasonal patterns of landscaping work, and the relationship-based aspects of the business all affect how financials should be presented to potential buyers or investors.
Since 1977, SpringGreen has been part of the green industry’s growth and evolution. We’ve seen how understanding business valuation helps our franchise partners make better decisions about their financial futures. Whether they’re looking to sell, expand, or bring in partners, having clear financial information makes all the difference.
The key is getting professional help when you need it. Financial recasting might seem straightforward, but the details matter enormously. A small mistake in how you present adjustments can cost you thousands of dollars in reduced business value.
Take the time to understand your options. Work with experienced professionals. And make sure you’re presenting your business’s true financial story when the time comes to make important financial decisions.
Your business represents years of hard work and investment.
Make sure you get full value for what you’ve built!
