Recast Financials Explained: Add-Backs Without the Spin
Why owners understate profit
Most small-business owners run their books to minimize taxable income — personal expenses through the company, aggressive deductions, family members on payroll. The raw P&L understates true earnings.
What counts as an add-back
Legitimate add-backs: owner salary above fair-market replacement cost, owner health insurance and retirement contributions, personal vehicles and travel, discretionary meals, family payroll for no real work, and one-time expenses.
What does NOT count
Recurring expenses a new owner must absorb, wages needed to replace actual owner labor, and anything undocumented. The test: "would a reasonable buyer have to spend this money to run the business?"
Why conservative wins
Lenders and sophisticated buyers will redo your recast themselves. An inflated number destroys credibility, kills financing, and can sink the deal in diligence.
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