Recasting Your Financials for a Sale

Why Recasting Exists

Owner-run books are usually built to minimize tax, which is the opposite of what a buyer and their lender want to see. Recasting bridges the two: it restates your profit-and-loss to show what the business truly earns for its owner, the figure buyers actually price a multiple against. Done from the documents, it is not spin; it is translating an owner's tax-optimized statements into the true-earnings language the buyer's side speaks.

The Add-Backs That Survive

The defensible adjustments are the ones you can document: an owner's salary restated to a market wage, genuinely one-time expenses, discretionary or personal costs run through the business, and non-cash items like depreciation. Each needs a paper trail, because the buyer's lender will test every line. An add-back you cannot prove is one the lender strikes, and a struck add-back is earnings you will not be paid for.

The Add-Backs That Don't

The adjustments that backfire are the wishful ones: routine repairs relabeled one-time, an owner's replacement wage understated to inflate earnings, or revenue that plainly walks out the door with you. Aggressive recasting does more than fail on its own line; read as a credibility problem, it taxes the entire file and makes a buyer question the numbers that were sound. Claim only what you would be comfortable defending across the table with the documents in hand.

Clean Books Beat Clever Books

The strongest financial file is three years of statements that tie to the tax returns, revenue broken out by customer, and a chart of accounts a stranger can follow without a guided tour. If the books need cleanup, do it before you list, not during diligence: earnings restated while a buyer is watching are earnings discounted in the negotiation that follows. The buyer's diligence page on this site is the same checklist read from their side; work it from yours first.

SDE or Adjusted EBITDA

Which earnings measure your buyer uses depends on who they are. An owner-operator financing an acquisition typically works in seller's discretionary earnings, which credits back the owner's full compensation; a consolidator sizing a platform usually works in adjusted EBITDA, which does not. The multiple attaches to whichever measure applies, so knowing both, and which one the buyer across the table will use, is worth real money. The buyer-side valuation tools carry the cited multiple bands that sit on top of each.

What the Data Says

• The SBA's rules for a change of ownership let a lender adjust cash flow for unfunded capital expenditures, non-recurring income, distributions, S corporation tax distributions, seller discretionary expenses and ownership compensation, and add back rent when the occupied real estate is bought too. An adjustment to ownership compensation must also pass a global cash flow analysis at 1 to 1 coverage, and the buyer's pay must cover their current obligations and living expenses. The rules also set the price of using any of them. The lender must outline why each adjustment is prudent and necessary and how the ongoing business supports it, that justification has to sit in the credit memorandum, and an adjustment without it is ineligible for the calculation the loan turns on. That calculation has a number on it: debt service coverage must reach 1.25 to 1 on an initial acquisition, 1.15 to 1 on a business expansion and 1.25 to 1 on an owner buyout or an ESOP or cooperative sale.

  Source: SBA, SOP 50 10 8.1, effective 1 October 2026, adjusted debt service coverage

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