Business brokers are typically well-versed in helping you understand the principles and methods that apply in the recasting process used to assess the historical performance of the business. The process of recasting financial statements is necessary to determine the value of a business when the owner’s intentions are to sell.
For you, the recasting process results in the determination of a value for free cash flow that you are likely to realize when you become the new owner of the business. The process also results in a better understanding of the health of the business and how the seller is spending money generated by the business. Recasting requires you and your advisors to investigate and verify that all sources and uses of cash are correctly reported before making adjustments to seller’s discretionary earnings and other balance sheet items.
As in the business appraisal process, the recasting process typically identifies excessive and discretionary expenses and nonrecurring revenues and expenses. Importantly to you, the total benefits that accrue to the owner (salary, commissions, perquisites, incentives, personal loans and other discretionary expenses) are considered when the value of the company, and ultimately the purchase price, are weighed together with the other aspects of the business, including the businesses’ future earnings capacity.