Recasting is the work of turning reported results into a buyer-relevant earnings view.
Recasting is the work of turning reported results into a buyer-relevant earnings view. It is not a wish list of expenses the owner would like to erase. Every add-back needs an account, date, source document, and post-closing treatment, and missing costs such as replacement labor, market rent, and catch-up maintenance must reduce the recast. The finished package should be reproducible enough to drop into a confidential information memorandum without rewriting the story later.
What to know before using the headline number
- A recast is a controlled workpaper that starts from a ledger or tax-return total. It is not a list of expenses the owner wishes would vanish.
- Every proposed add-back needs an account, date or range, source document, and post-closing treatment before it enters the CIM.
- Missing costs—replacement labor, market rent, catch-up maintenance, omitted benefits—must reduce the recast or the package is incomplete.
- Apply one written policy across comparison years. Different one-time labels in the same account are often a recurring cost.
- The recast that a broker CIM prints should be versioned, reproducible, and conservative enough that a buyer can rebuild it.
A recast is a workpaper, not a marketing request
Owners often confuse recasting with advocacy. They list every vehicle, meal, family wage, and unusual invoice, add the pile to reported profit, and call the total seller’s discretionary earnings. That is a wish list. A recast is an accounting workpaper that starts with a control total from the ledger or tax return and moves, line by line, to the earnings a buyer can underwrite. The IBBA glossary describes add-backs as amounts used to place figures closer to economic earnings actually derived from the business. Closer is the operative word. The destination is not the highest number that still looks tidy in a CIM.
The recast package that feeds a confidential information memorandum is different from a private add-back brainstorm. Buyers, lenders, and quality-of-earnings reviewers will rebuild it. If a line cannot survive that rebuild, it should not appear in the marketed earnings. IRS recordkeeping guidance emphasizes agreement among bank activity, books, and supporting records. A recast that cannot be tied to those records is not ready for a sale process.
Every add-back needs four fields before it is allowed in
Require four fields on every proposed line: the exact ledger account, the date or date range, the source document, and the expected treatment after closing. An account without a date is a category. A date without a document is a memory. A document without a post-close rule leaves the buyer to guess whether the cost disappears, continues, or must be replaced. Guessing is how recasts inflate.
Post-close treatment is the field owners skip. Personal travel that stops is different from a vehicle the practice manager still needs. A one-time software conversion is different from annual licensing. Spouse wages are different if the spouse actually runs the front desk. Writing the buyer’s operating assumption next to each line forces honesty before the CIM is drafted, not after a lender asks for invoices.
Missing costs must reduce the recast
A complete recast moves in both directions. Replacement labor for work the owner or an underpaid relative performs, rent brought to a supportable market level, deferred equipment service, and omitted benefits all belong on the schedule as negative adjustments. Leaving them out does not make the company more valuable. It makes the first diligence meeting a correction session.
Public occupational wage evidence, such as Bureau of Labor Statistics occupational estimates, is a starting point for pricing replacement roles, not a plug that can be dropped in without looking at local duties. A veterinary associate, a practice manager, and an owner-doctor who still takes the emergency board are different jobs. The recast should cost the work a buyer must staff, using labor-market evidence plus the company’s actual schedule, licenses, and after-hours load.
Build the package the CIM will actually print
The recast that belongs in a CIM is a multi-year bridge with a written policy, not a single-year miracle. Show reported pretax income or another named starting point, each adjustment, the resulting SDE or adjusted EBITDA, and a short note on recurrence. Use the same policy in every comparison year. If legal expense is treated as nonrecurring in the current year, test the same account historically. Different one-time labels every year are a recurring cost wearing a costume.
Version control matters because the CIM will freeze a number that advisers, buyers, and lenders will quote back. Keep proposed, accepted, disputed, and withdrawn columns. Do not silently overwrite last week’s recast when a new invoice appears. The SBA’s acquisition guidance expects diligence on the figures used to support a transaction. A moving earnings total without a bridge is a diligence defect, even if each version felt well-intentioned.
Separate tax classification from buyer economics
An expense can be deductible and still be necessary after closing. Meals, vehicles, continuing education, and owner benefits often have a tax story and a different operating story. Recasting from the tax return without reading the invoices mixes those stories. IRS valuation analysis looks at earning capacity, not at whether an item was allowed on a prior return. The recast should follow the buyer’s cost to run the practice, not the owner’s historical tax posture.
Related-party rent is the classic example. Family-owned real estate at a below-market figure can make reported earnings look strong until the lease is rewritten or the property is priced separately. The recast should state the occupancy cost a nonrelated operator would pay, including taxes, insurance, and maintenance if those are shifting. Adding back all rent while assuming free occupancy is internally inconsistent.
A veterinary recast is a clinical-capacity file, not a perk list
In a hypothetical veterinary practice, the tempting recast is owner wages plus every personal charge card item. The useful recast is doctor production by provider, associate compensation versus the work performed, rent, equipment condition, inventory quality, and the owner’s remaining clinical hours. If the selling veterinarian still produces a large share of surgery and dentistry, the recast must either keep that production out of the transferable run rate or insert the cost of replacing it.
The CIM should not advertise a recast that assumes the seller keeps working as an unpaid associate. Nor should it add back a spouse’s wages if that person is the only experienced receptionist. The package is ready when another accountant can rebuild the bridge from the general ledger, payroll, lease, and vendor files without calling the owner for narrative. That is the standard. Comfort is not.
Four fields and a fifth test for every recast line
If a line cannot complete this grid, it is not ready for a confidential information memorandum.
| Issue | What the owner should assemble | What a buyer is likely to test | Why it changes the decision |
|---|---|---|---|
| Account identity | General-ledger account, vendor, and amount that ties to the trial balance. | Trace the amount to the native export without rounded estimates. | Category names such as perks or extra payroll are rejected until they become accounts. |
| Date and recurrence | Invoice dates, payroll periods, and a three-year view of the same account. | Ask whether a similar item appears under another label in prior years. | A repeating pattern becomes a normalized provision instead of a full add-back. |
| Source document | Invoice, payroll register, lease, settlement statement, or other primary support. | Open the document; do not accept a tax classification as proof of post-close treatment. | Unsupported lines come out of the marketed recast, not into a disputed appendix later. |
| Post-close treatment | Written assumption: stops, continues, or is replaced, with the buyer’s operating plan. | Compare the assumption with staffing, occupancy, and equipment the company still needs. | Personal portions may come out; necessary functions stay in as costs. |
| Missing-cost test | Owner-role map, family wages, rent versus market, maintenance logs, open positions. | Insert replacement labor, occupancy, and catch-up items even when the seller omitted them. | Negative adjustments lower SDE or EBITDA and raise credibility. |
Worked example: a veterinary CIM recast that had to move down
This example is hypothetical. A veterinary practice reports $207,300 of pretax income. The draft CIM recast adds owner payroll and several personal items and markets $471,000 of SDE. The review applies the four-field test and the missing-cost test instead of accepting the perk list.
| Recast line | Draft CIM amount | Evidence result | Supported amount |
|---|---|---|---|
| Owner W-2 and payroll tax | $171,400 | One working owner-doctor; tied to payroll | $171,400 |
| Personal travel on the practice card | $16,240 | Itineraries show nonclinical trips | $16,240 |
| Practice-management software conversion | $33,800 | Isolated project; old system retired | $33,800 |
| Spouse front-desk wages added back | $42,260 | Spouse is the only trained receptionist | $0; role continues |
| Family-building rent brought to market | Not in draft | Independent lease evidence supports +$37,600 cost | -$37,600 |
| Associate veterinarian wage gap | Not in draft | Production requires $48,900 more than paid | -$48,900 |
| Catch-up on dental unit and autoclave service | Not in draft | Vendor quote for overdue work | -$19,750 |
Start with $207,300 pretax. Supported positive adjustments are $171,400, $16,240, and $33,800, or $221,440. Negative adjustments for rent, associate pay, and equipment service total $106,250. Spouse wages of $42,260 stay in the cost structure because the function does not leave with the sale. Supported recast SDE is about $322,490, not $471,000.
The draft CIM was not a little optimistic. It omitted the costs that make the practice runnable without the family. A buyer who staffs an associate at market and pays occupancy will not underwrite $471,000 of discretionary earnings. They will underwrite the lower bridge and then ask what else was skipped.
This recast still is not a value. It is the earnings exhibit the CIM should have printed. Multiples, working capital, real estate, and chart transfer remain separate questions. Getting the exhibit right is how the rest of the process stays adult.
Assemble a CIM-ready recast package
Treat the recast like a workpaper that will be emailed to people who do not know you and do not trust round numbers.
- 01
Lock the starting control total
Choose pretax income, net income, or another named starting point that ties to the financial statements and tax return. Freeze the export date.
Deliverable: Control-total cover sheet
- 02
Write the adjustment policy
Define SDE versus adjusted EBITDA, how many owners are in the SDE definition, and how replacement management is handled.
Deliverable: One-page recast policy
- 03
Build the four-field ledger
For each line capture account, date, document link, amount, and post-close treatment. Assign an ID so revisions do not overwrite history.
Deliverable: Line-item recast ledger
- 04
Force the missing-cost pass
Map owner and family duties, occupancy, maintenance, benefits, and open roles. Insert negative adjustments with support.
Deliverable: Buyer-required cost schedule
- 05
Apply the policy to every comparison year
Recast at least three years plus a trailing period if it is closed. Explain breaks in pattern instead of dropping inconvenient years.
Deliverable: Multi-year recast workbook
- 06
Freeze the CIM exhibit
Export the accepted bridge, list disputed items separately, and prohibit silent edits after the booklet is released.
Deliverable: Version-stamped CIM recast exhibit
Where otherwise credible analyses break down
Adding back a family wage without replacing the work
Why it matters: The CIM then assumes a receptionist, bookkeeper, or technician will appear for free after closing.
Better approach: Keep the function in the cost structure or insert a market replacement and show the net effect.
Using tax deductibility as the add-back test
Why it matters: A deductible vehicle, meal, or education cost can still be required to produce the earnings being sold.
Better approach: Test business purpose and buyer need, then adjust only the documented personal portion.
Recasting only the featured year
Why it matters: Buyers will recast the unloved years and treat the featured recast as advocacy.
Better approach: Apply one policy across the whole comparison set and let the CIM show the range.
Letting the CIM author round until the number looks marketable
Why it matters: Rounded recasts cannot be tied to invoices and collapse in the first diligence request.
Better approach: Keep cents in the workpaper and round only in labeled summaries, with a tie-out.
What a defensible owner decision looks like
I have no interest in helping an owner inflate a recast so a CIM can print a rounder SDE. The useful recast is the one a buyer’s accountant can rebuild on a Tuesday morning without calling you. Four fields and a missing-cost test sound fussy until you watch a $471,000 exhibit become $322,490 in the first real review.
If your bookkeeper already built a perk list, keep it as draft pages. Then make it a package: policy, multi-year application, documents, and negative adjustments. That package is what a sale process actually uses.
A smaller supported recast does not mean the company is worse than you thought. It means the marketed earnings finally describe the practice a buyer can run. That is the only recast worth stapling to a CIM.
Questions owners ask
Is recasting the same as listing add-backs?
No. Add-backs are individual proposed adjustments. Recasting is the controlled package: starting control total, policy, multi-year application, negative adjustments, evidence, and the earnings definition that will appear in the CIM.
Can I recast based on next year’s plan?
Not as historical earnings. A forecast can be shown separately with drivers, costs, and capacity. Mixing hoped-for results into a recast of past periods is how inflated SDE numbers are born.
What if my bookkeeper already prepared a recast?
Use it as a draft. Tie every line to an account, date, document, and post-close treatment, add missing costs, and apply the same policy to prior years before the figure is locked into marketing materials.
Should the recast include a forecast year?
Not inside historical SDE. Show a labeled pro forma with capacity, hiring, and price assumptions if the story depends on change. Mixing the two is how wish lists get into the CIM.
How do I recast related-party rent?
Replace the recorded amount with a supportable occupancy cost for the space the buyer will occupy, and state who pays taxes, insurance, and maintenance. Do not add back all rent while assuming free use of the building.
What if the buyer disputes a documented add-back?
Leave it visible as disputed and show sensitivity. Do not delete the line to manufacture agreement. A clean disagreement is healthier than a silent revision.
Sources and review date
Last reviewed: September 3, 2026. Sources are linked for context; a national benchmark is not a substitute for local comparable sales or a purpose-specific appraisal.
- IRS Publication 583: Starting a Business and Keeping Records — Describes recordkeeping and reconciliation practices, including agreement among bank statements, books, and supporting business records.
- IRS valuation job aid and Revenue Ruling 59-60 — Appendix A reproduces Revenue Ruling 59-60 and its closely held business valuation factors; the job aid itself states that it is not legal authority.
- U.S. Bureau of Labor Statistics: Occupational Employment and Wage Statistics — A public starting point for testing market-rate replacement compensation; local duties and labor markets still require judgment.
- U.S. Small Business Administration: Merge and acquire businesses — Owner-oriented guidance on valuation, agreements, due diligence, and professional support in an acquisition.
- International Business Brokers Association glossary — Professional definitions for SDE, transaction terms, and Main Street business brokerage concepts.
- U.S. Small Business Administration: Close or sell your business — Current owner guidance on sale planning, valuation approaches, sale agreements, transfer choices, professional advice, and maintaining required records.
- IRS Internal Revenue Manual 4.10.3: Examination Techniques — Provides official examination procedures, including reconciliation of bank deposits to reported gross receipts for appropriate small and medium-size taxpayers.