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Perfect — here’s the revised and enhanced version of your article “How to Recast Financials to Show True Earning Power” with integrated references and links to The Entrepreneur’s Exit Playbook.
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How to Recast Financials to Show True Earning Power
By Kristopher B. Jones
Introduction: The Numbers Behind the Narrative
When I sold Pepperjam, I remember sitting across from the buyer’s CFO as they reviewed our financials line by line.
They weren’t just verifying numbers—they were trying to understand the story behind them.
That’s when I learned one of the most important lessons in M&A: your financial statements don’t tell the full story until you recast them.
As I explain in my book, The Entrepreneur’s Exit Playbook, financial recasting is how you transform your company’s numbers into a compelling, defensible story of value. It’s how you show a buyer the true earning power of your business—not just what your tax return says, but what your company is actually worth as a going concern.
It’s one of the most powerful tools founders have to defend their valuation. Yet most don’t even realize it exists until they’re already deep in diligence.
At Legacy Advisors, we help founders do this early—before a buyer ever sees the books—so the numbers reflect the real performance and potential of the business.
What Is Financial Recasting?
Financial recasting (sometimes called “normalizing”) is the process of adjusting your historical financial statements to reflect the true, ongoing earning potential of the business.
In other words, it strips out anything unusual, one-time, or personal that doesn’t represent the company’s future operations.
Think of it like this: your tax returns are designed to minimize income; your recast financials are designed to maximize value.
Buyers want to see a clear, normalized picture of how the company performs under normal conditions—and how much profit it can sustainably generate going forward.
Why It Matters in an Exit
Most small and mid-market companies have financials that reflect tax efficiency, not valuation readiness.
That means your books likely include:
- Owner salaries or perks that wouldn’t exist under new ownership
- One-time legal or consulting expenses
- Family members on payroll
- Non-operating income or losses
- Personal travel, vehicles, or benefits buried in company expenses
When buyers see these items, they can misread your profitability. A recast gives you the chance to explain and adjust those distortions so your real earnings shine through.
In The Entrepreneur’s Exit Playbook, I dedicate an entire section to explaining how these adjustments—when properly documented—can increase your EBITDA multiple and strengthen your negotiating position.
The Core Adjustments: What to Include in a Recast
Here’s what founders should review before presenting financials to buyers.
1. Owner Compensation and Benefits
Most entrepreneurs pay themselves more (or less) than a market-rate salary for tax or lifestyle reasons. Adjust this to reflect what a replacement CEO or GM would reasonably earn.
Also, remove personal expenses—cars, travel, family insurance, entertainment—that won’t continue under new ownership.
2. One-Time or Non-Recurring Expenses
If you had a one-time legal dispute, a one-off marketing push, or a major equipment repair, these should be adjusted out. They’re not part of ongoing operations.
3. Non-Cash or Non-Operating Items
Depreciation, amortization, and investment income are examples. Buyers typically focus on cash-based earnings, so non-cash or unrelated income streams should be clarified or removed.
4. Related-Party Transactions
If you lease property from yourself or buy from a related entity, normalize those costs to fair market value. Buyers want to know what expenses will look like post-sale when everything’s arms-length.
5. Extraordinary Revenue Events
Did you land an unusually large contract or sell a division? Those can inflate a single year’s results. Recasting smooths out anomalies to show sustainable performance.
Example: Turning $1.2 Million Into $1.6 Million
Let’s say your tax return shows $1.2 million in net income.
After reviewing, you find:
- $150,000 in owner salary above market rate
- $100,000 in one-time legal fees
- $80,000 in personal travel
- $70,000 in non-recurring consulting costs
Your recast EBITDA rises from $1.2 million to $1.6 million—a $400,000 swing.
At an 8x EBITDA multiple, that’s a $3.2 million increase in enterprise value—just from properly recasting your numbers.
As I point out in The Entrepreneur’s Exit Playbook, this exercise alone often adds seven figures to a founder’s exit—without increasing revenue by a single dollar.
When to Start Recasting
If you wait until diligence to do this, you’ve already lost leverage.
Recasting should begin 6–12 months before you go to market. That gives you time to validate adjustments, align your CPA and advisor, and document everything for buyers.
At Legacy Advisors, we start this conversation early. A well-documented recast turns negotiations from defensive to proactive.
Instead of “Why is your EBITDA so high?” the conversation becomes “Here’s how we adjusted for normalization, and here’s the data to support it.”
How to Document Your Adjustments
Buyers won’t just take your word for it—you need evidence.
Create a simple reconciliation schedule that:
- Lists each adjustment clearly.
- Explains why it’s non-recurring or non-operational.
- Ties back to your original financial statements.
Transparency builds trust. If your adjustments are clean, logical, and well-supported, buyers will respect them.
Pro Tip: Align With a CPA Who Understands M&A
Not all accountants understand recasting. Tax accountants aim to minimize income. M&A accountants focus on maximizing clarity and defensibility.
You need both—but when it’s time to sell, your numbers must be valuation-ready, not just IRS-compliant.
That’s why in The Entrepreneur’s Exit Playbook, I emphasize building your “Exit Team” early—your CPA, attorney, and advisor working together toward a single goal: positioning your company for the strongest possible valuation.
The Real Goal: Telling the Truth Better
Recasting isn’t about manipulating your numbers—it’s about telling your company’s financial story accurately.
It lets buyers see the business the way you see it: through the lens of its true earning power.
When done right, it strengthens trust, increases value, and shortens diligence.
At Legacy Advisors, we help founders navigate this process early so they enter the market prepared, confident, and in control of their narrative.
For a deeper breakdown of this process—and every other step toward building an exit-ready company—grab a copy of my book, The Entrepreneur’s Exit Playbook. It’s the roadmap I wish I’d had before my first sale.
Because when you know your real numbers—and can prove them—you negotiate from strength, not pressure.
Frequently Asked Questions About Financial Recasting
What does it mean to “recast” financials before selling a business?
Recasting your financials means adjusting your historical financial statements to reflect the true, ongoing earning power of your company. It removes non-recurring, one-time, or personal expenses that distort profitability and gives buyers a clearer picture of what the business would look like under new ownership. As I explain in The Entrepreneur’s Exit Playbook, tax returns tell one story—minimizing income. Recast financials tell another—maximizing value. This process ensures buyers see your company’s real performance, not just what your accountant reports to the IRS.
Why is recasting so important before an exit?
Your valuation is only as strong as the story your numbers tell. Without recasting, buyers may undervalue your company because your tax-focused financials hide its true profitability. Recasting allows you to proactively present a normalized view of operations, free of one-time costs, personal benefits, or tax minimization tactics. At Legacy Advisors, we’ve seen this process add millions in enterprise value for clients who started preparing early. Done right, it shifts diligence from defensive (“let us explain these numbers”) to confident (“here’s the real story behind our performance”).
What kinds of adjustments are typically made during recasting?
Most recasts focus on five core areas:
- Owner compensation and perks (adjust to market-rate pay and remove personal expenses).
- One-time expenses (legal disputes, consulting projects, major repairs).
- Non-operating items (investment income, unrelated costs).
- Related-party transactions (normalize rent or vendor rates).
- Extraordinary revenue events (large one-off deals).
Each adjustment should be clearly documented, explained, and tied back to your original statements. In The Entrepreneur’s Exit Playbook, I outline how these adjustments can turn a “tax-efficient” income statement into a “valuation-optimized” one that buyers trust.
When should I start recasting my financials before selling?
Start 6 to 12 months before going to market—or even earlier if possible. That gives you time to identify adjustments, validate them with your CPA, and build supporting documentation. Waiting until diligence starts means you’re playing defense while the buyer’s team controls the timeline. At Legacy Advisors, we build financial recasting into every client’s exit-readiness plan because it’s one of the fastest, most controllable ways to increase enterprise value. As I emphasize in The Entrepreneur’s Exit Playbook, early preparation always equals better outcomes.
Can Legacy Advisors help me recast my financials and prepare for exit?
Absolutely. At Legacy Advisors, we specialize in preparing founders for the M&A process long before they list their business. Our team works with your CPA to build buyer-ready financials that reflect your company’s true earning power and withstand diligence. We use the same strategies I outline in The Entrepreneur’s Exit Playbook—from recasting and quality-of-earnings prep to valuation positioning—to ensure you go to market with confidence. If you’re thinking about selling in the next 12–24 months, let’s make sure your numbers tell the right story.