Recasting — also called normalizing or adjusting financial statements — is the process of starting with tax return net income and adding back legitimate owner benefits and non-recurring expenses to arrive at Seller's Discretionary Earnings. Recasting is standard practice in business sales and is expected by buyers and lenders — but it must be done honestly and supportably.
What Can Be Added Back
Standard add-backs include: owner W-2 compensation and bonuses, owner health insurance premiums, owner retirement plan contributions (SEP, SIMPLE, solo 401k), personal use of business vehicle (documented mileage), personal cell phone and home office expenses if run through the business, non-recurring professional fees (legal costs from a one-time dispute), and depreciation and amortization. Each add-back should be clearly documented.
What Cannot Be Added Back
Non-recurring revenue, costs that would need to be replaced by a buyer (key employee salaries at market rate), or expenses that are genuinely necessary for operations are not legitimate add-backs. Aggressive add-backs that buyers will contest in due diligence cause more damage to a deal than simply presenting accurate numbers. Credible recasting that withstands scrutiny builds buyer confidence; aggressive recasting that gets challenged destroys it.
Your business broker should prepare a formal SDE Recasting Statement as part of the Confidential Business Review. This document presents the adjustments transparently, with line-by-line documentation of each add-back and the rationale supporting it.