We recently published an article outlining the importance of having your company valued before going to market. In that piece we examined why this is important for YOU(so you have a good idea of the current market value) and for BUYERS (so that they know you are committed to actually selling your company and you have appropriate value expectations). We also mentioned how vital it was to use “recast” financials as part of the evaluation process. Given the fact that most business owners are not familiar with this term and concept, we wanted to do a follow-up piece on recasting, providing you further details on this key step in any valuation process.
So what is recasting (also called normalization)? There are actually several definitions:
The act of amending and re-releasing a previously released earnings statement, with specified intent. Some of the most typical reasons for recasting earnings are to show the impact of a discontinued business or to separate out earnings-related events that are deemed to be non-recurring or otherwise non-representative of normal business earnings.
From The Houston Chronicle:
Normalizing a financial statement involves adjusting it so that it reflects only the "normal" affairs of a company. For example, your business might own a single parcel of land. If you sold that land, the gain from the sale would go on your income statement and would increase your profit for the year. But the land sale would be a one-time event -- an aberration. You won't be selling more land in the years to come, so that gain isn't repeatable, and your profit for the year is abnormally high. On a normalized income statement, you would remove the land sale, along with all other one-time, unusual or nonrecurring items. The only items that would remain on the statement would be the revenues and expenses directly related to the normal operations of your business.
From the Generational Equity M&A Glossary:
Recasting, or financial statement adjusting, eliminates from the historical financial presentation items that are unrelated to the ongoing business, such as superfluous, excessive, or discretionary expenses, and nonrecurring revenues and expenses. Recasting provides an economic view of the company as though it were run by management dedicated to maximizing profitability and allows meaningful comparisons with other investment opportunities.
To sum up, recasting is a GAAP (Generally Accepted Accounting Principle) approved method by which you are allowed to restate your financials to reflect the true historic profitability of your business. The key point is found in the last sentence of the last definition above: It allows “meaningful comparisons” to other investment opportunities.
This is especially critical when you present your company to buyers. If you are providing historic numbers that are not adjusted, then a buyer will be looking at your company in comparison to others, many of which will be using recast financials, that will force them to discount your value (because your true earnings will be understated) when they do their comparative analysis. Now professional buyers will not let you know this since they will be looking for the best possible deal. However, this happens all too often to unsuspecting entrepreneurs who attempt to find buyers without professional M&A advice.
The reality is you and your accountant have worked very hard, and legally, throughout the years to keep your tax burden low by expensing items that may not be directly related to the ongoing operations of your business. You may not even be aware of the impact that recasting may have on your financials. Many are not until they go through our evaluation process. Some typical examples of recasting that we encounter include:
This is just a short list of some of the common recasting situations we see. There are literally dozens of others that also crop up.
The key for you is this: Recasting is a VITAL step that needs to be done long before you approach any buyers. If you don’t, you may be understating your true profitability. This could end up costing you thousands and thousands of dollars in lost value.
However, just as importantly, the accuracy of any recasting done to your financials is paramount. In your offering memorandum that will be provided to buyers who sign a CA (confidentiality agreement) with you will need to outline – clearly and in great detail – what is being recast and why. Buyers will be concerned if you are unable to provide specific details regarding what is being revised and why it is being adjusted. And, since you are most likely not an accountant and have never recast financials before, you need to ensure that any adjustments made are legitimate.
Given the need for accuracy, documentation, and legitimacy, it is far better to hire an M&A advisor to provide this service to you rather than try to do it on your own or have your in-house accountant do it for you. He or she may be able to do some basic recasting work, but to really dig deeply into your situation requires a professional with years of experience.
This is what sets Generational Equity apart from others providing this service: We are the leading M&A firm working in the middle market. In fact, our valuation team was recognized last year by The M&A Advisor as the “Valuation Firm of the Year,” and we have been named as the “M&A Consulting/Advisory Firm of the Year” by the same industry group twice (2011 and 2013).
These are peer review awards and mean a great deal to us because they are not easy to achieve and are reflective of the tremendous service we provide to our clients. If you would like to learn more about recasting specifically, M&A trends in general, or about our services, please make plans to attend a Generational Equity M&A seminar. These are provided with no obligation on your part and are conveniently held in cities throughout the U.S. and Canada.
Carl Doerksen is the Director of Corporate Development at Generational Equity.
© 2015 Generational Equity, LLC. All Rights Reserved.
Your wisdom and experience were invaluable to me during this once-in-a-lifetime transaction.Ralph Noblin, President of Noblin & Associates
The process was much more involved than I expected and your help, experience and advice was a big factor in making the negotiations go as smoothly as possible.Terry D. Wickman, President, Keytroller
I quickly recognized that Don was working for Sharpe Mixers above all else, and held our interests above others.Jay Dinnison, Owner of Sharpe Mixers
I would like to thank you and your firm, Generational Equity, for being our valued advisors in our journey.Bil MacLeslie, CEO, ipHouse
I couldn’t have asked for a better team than Michael and Deborah. We couldn’t have done it without them.Robert Evans, President and CEO of Mealtracker Dietary Software
We are very happy with the end result, and are very happy to be able to move forward with all of our future growth plans.Rick Nowak, President/CEO, Kurz Electric Solutions, Inc.
I must say that I have never worked with a more driven, competent and focused individual as Don Ho.Jay Dinnison, Owner of Sharpe Mixers
Generational Equity educated and informed us – so that we could be on the upside of a good decision (to sell).Bil MacLeslie, CEO, ipHouse
I wanted to write you a quick letter to express our appreciation and our delight on the outcome of helping us through the process of our recent sale. We are very happy with the end result, and are very happy to be able to move forward with all of our future growth plans.Terry D. Wickman, President, Keytroller
We are extremely pleased with the way Generational Equity handled the sale of our company. Your associates, Tom and Chris, did an outstanding job of getting us (me) through the process.Michael J Polarek, President, Paragon Packaging
We were happy to see the interest in our company and what we cherished has not just a valuable company but an important company to the communities we served in.Larry Moore, Owner, A Company Portable Restrooms
We knew it would be a difficult task to have someone really understand our business and our market, prior to researching a possible buyer, so it was imperative that we found someone of your caliber, with definite proven experience in this area.Rick Nowak, President/CEO, Kurz Electric Solutions, Inc.
Generational Equity’s assistance was invaluable in compiling and marketing our business.Bil MacLeslie, CEO, ipHouse
We will highly recommend Generational Equity and Musa Jagne to any business owner about to embark on the same process.Karen S. Williams, CFO, BW Manufacturing
Bruce and I wanted to take this opportunity to thank Generational Equity for assigning Musa Jagne to our transaction. In Bruce’s words, “Musa did one hell of a job for us!”Karen S. Williams, CFO, BW Manufacturing
Michael worked tirelessly, He followed every lead meticulously and urgently to make sure nothing was missed.Robert Evans, President and CEO of Mealtracker Dietary Software
We thank you Eric and Generational Equity making our dream come true.Larry Moore, Owner, A Company Portable Restrooms
The help you provided us during each step of this process made us feel very comfortable and confident we were selecting the right approach to transition our Company.Andy Graham, Vice President, Modern Heating & Plumbing
Tom Staszak is one of the most professional people I have dealt with in my last forty years of business. You’ve got a great group of people and you have built a truly professional organization.Michael J Polarek, President, Paragon Packaging
Thanks again Phil and feel free to have a future client call me if they would like a referral. You are a true professional!Andy Graham, Vice President, Modern Heating & Plumbing
Thank you again for all your guidance and support. Any company will achieve what they intend, if they have you on their team!Rick Nowak, President/CEO, Kurz Electric Solutions, Inc.
The information we learn from customers helps us personalize and continually improve your experience. Here are the types of information we gather.
We receive and store any information you enter on our Web site or give us in any other way. We do not sell or rent your personal information to others without your consent. We use the information we collect only for the purposes sending promotional information, enhancing the operation of our site, serving advertisements, for statistical purposes and to administer our systems. We DO NOT use third parties to provide customer service, to serve site content, to serve the advertisements you see on our site, to conduct surveys, to help administer promotional emails, or to administer drawings or contests, but reserve the right to do so in the future without advance notice.
By submitting my name electronically and clicking the “submit” button, I understand that I am providing Generational Group, Inc., Generational Equity, LLC, Generational Capital Markets, LLC, DealForce LLC, their affiliates, representatives, contractors, etc. (“Generational Group”) my telephone number, which may include a number that is wireless and/or a number that is on a national, state, or other Do Not Call registry or list. I hereby consent and agree to receive telephone calls including any autodialed and/or pre-recorded telemarketing calls and/or text messages (telemarketing) from or on behalf of Generational Group at the telephone number provided. I further consent and agree that telephone calls may be made using automated technology such as an automatic telephone dialing system, artificial or prerecorded voice, or SMS text messaging. Consent is not a condition of purchase. I further warrant and represent that any telephone number provided is not on any state or national Do Not Call Registry and that by agreeing to these terms and conditions that if any number provided is on any such registry, I hereby consent and agree to receive telemarking calls and/or communications including any phone calls, text messages, URLs, links, emails, etc. to the telephone number(s) and/or any e-mail addresses provided. I understand that by entering my name in the electronic form provided, that I am signing my name as equally as if it was my handwritten signature and that it is my intent to provide an “electronic signature” as that term is defined in state and federal law, as well as industry practices for e-commerce.
For reasons such as improving personalization of our service, we might receive information about you from other sources and add it to our account information.
Generational Group may license the use of its intellectual property including but not limited to its name, likeness, and logo for the use of affiliated offices. Such affiliated offices may not be owned, controlled, managed, supervised or staffed by employees, officers, or agents of Generational Group. Affiliated offices may be independently owned and operated. For more information about a particular office, please contact Generational Group at its office in Dallas, Texas.
This page may contain other proprietary notices and copyright information, the terms of which must be observed and followed.
Information on this web site may contain technical inaccuracies or typographical errors. Information may be changed or updated without notice. Generational Group may also make improvements and/or changes in the products and/or the programs described in this information at any time without notice.
Generational Group does not want to receive confidential or proprietary information from you through our web site. Please note that any information or material sent to Generational Group will be deemed NOT to be confidential. By sending Generational Group any information or material, you grant Generational Group an unrestricted, irrevocable license to use, reproduce, display, perform, modify, transmit and distribute those materials or information, and you also agree that Generational Group is free to use any ideas, concepts, know-how or techniques that you send us for any purpose.
Our computer system protects personal information using advanced firewall technology.
Information Generational Group publishes on the World Wide Web may contain references or cross references to other products, programs and services that are not announced or available in your country. Such references do not imply that Generational Group intends to announce such products, programs or services in your country. Consult a Generational Group representative for information regarding the products, programs and services which may be available to you.
Generational Group makes no representations whatsoever about any other web site which you may access through this one. When you access a non-Generational Group web site, please understand that it is independent from Generational Group, and that Generational Group has no control over the content on that web site. In addition, a link to a non-Generational Group web site does not mean that Generational Group endorses or accepts any responsibility for the content, or the use, of such web site. It is up to you to take precautions to ensure that whatever you select for your use is free of such items as viruses, worms, Trojan horses and other items of a destructive nature.
IN NO EVENT WILL Generational Group BE LIABLE TO ANY PARTY OR ANY DIRECT, INDIRECT, SPECIAL OR OTHER CONSEQUENTIAL DAMAGES FOR ANY USE OF THIS WEBSITE, OR ON ANY OTHER HYPERLINKED WEBSITE, INCLUDING, WITHOUT LIMITATION, ANY LOST PROFITS, BUSINESS INTERRUPTION, LOSS OF PROGRAMS OR OTHER DATA ON YOUR INFORMATION HANDLING SYSTEM OR OTHERWISE, EVEN IF WE ARE EXPRESSLY ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.
Furthermore, all information contained within this website is the property of Generational Group.
Honored to win Investment Banking Firm of the Year 2 years running.
Over 50 awards and counting.
Sign up to receive regular email updates, industry-leading insights and details on complimentary M&A executive conferences in your area from our award-winning team
Success, you have been added to our list.