Recasting the Company Financials

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Why Recast the Financials

Documented business financials are "minimized" to show as little taxable income as possible. The company's true economic value is generally greater than the reported taxable value.

To derive the economic value of a company, you need to recast the financials to show the company's true economic value.

• For example, your tax position may allow you to take accelerated depreciation on capital investments.
  
  Let's say you invested $10,000 in capital equipment. If you depreciated your investment within 3 years, the reported book value after 3 years would be $0. Does that mean that the "market value" for the piece of equipment is valued at $0?
  
  That is why you need to recast the financials to show the true market value of the capital investment.

How to Determine Market Value

Market value reflects the cost to replace a piece of a equipment or asset to its current state minus its wear

• It is advisable to re-value your assets and equipment on the low side. If the buyer questions the value you assign certain equipment, it may raise flags that question your intent and asking price.

Another related line item is the owner's salary and perks. You need to add back owner salary and perks to reflect the true financial position of the company.

• For example, if the owner takes $100K in salary and perks showing a taxable income of $100K, you will need to add back the owner's salary and perks to show the true sales value of the company.

Recasting the financials reflects the true economic value of the business, prior to depreciation, non-operating interest charges, owner salary and perks, and non-recurring expenses.

Recasting the financials require:

• adding back depreciation and reflecting the replacement value of capital equipment and assets
• adding back non-operating interest expense taken for non-business use.
• adding back owner salary and perks
• adding back owner family salary and perks if it is unlikely that family members will stay with the company once it is sold
• remove any bad debts that will not be forwarded to the new owner
• remove any obsolete inventory
• remove any assets that will not or should not be sold to the new owner; i.e., the company car used by the owner or members of the owner's family
• write-off any loans the company made to the owner
• other: to be reviewed