What it means
Recasting means taking numbers a business has already reported and rearranging them so that like is compared with like. The most common trigger is a change in what the business consists of, such as selling a division that must then be shown as a discontinued operation.
Prior years are restated so that the continuing business can be tracked on a consistent basis. In private company sale processes the term carries a slightly different flavour.
Owner-managed businesses run personal costs, above-market or below-market owner salaries and family employment through the accounts, so reported profit understates what a new owner would actually earn. The recast, often presented as an add-back schedule or seller's discretionary earnings, adjusts for all of it.
This matters because price is normally a multiple of earnings. Every dollar added to recast profit is multiplied several times over in the sale price, which is exactly why buyers examine the add-back schedule line by line.
Adjustments that fail scrutiny come out, and the price falls by the multiple times the amount removed. Listed companies recast for different reasons, including a new accounting standard, a change in reportable segments or a change of presentation currency.
Regulators generally expect prior-period comparatives to be recast and clearly labelled so that users can trace the bridge from the old presentation to the new. A recast is not the same thing as a restatement for error, which signals that the original figures were wrong.
The nuance worth holding onto is that a recast changes presentation, not cash. The business generated whatever cash it generated, and recasting simply relabels it.
Anyone reviewing recast numbers should ask for the reconciliation back to audited figures rather than accept an adjusted total on its own.
In practice
Real-world examples.
Example
A precision engineering firm pays its founder $280,000 a year for a role a hired manager would fill at $140,000. The sale memorandum recasts earnings upwards by $140,000 to show what a new owner with professional management would earn, and supports it with two recruitment agency benchmarks.
Example
A listed retailer sells its logistics arm and must present it as a discontinued operation. It recasts three prior years of revenue and operating profit for the continuing business so investors can see the underlying growth rate of the shops without the distribution business mixed in.
Example
A property services group adopts a new lease accounting standard that moves rent out of operating costs and into depreciation and interest. It publishes recast prior-year figures alongside the new ones so that analysts can rebuild their models without guessing at the effect.
Formula
Calculation
Recast earnings = reported pre-tax profit + non-recurring costs + owner-specific discretionary costs - normalising adjustments.
A specialist printing company reports pre-tax profit of $420,000. The seller's adviser adds back $120,000 of owner salary above the market rate for an equivalent manager, $60,000 for a one-off legal settlement and $40,000 of losses from a product line that has since been closed. Against that, rent is adjusted by $40,000 because the building is leased from the owner below market rate. Recast earnings are $420,000 + $120,000 + $60,000 + $40,000 - $40,000 = $600,000. At an agreed multiple of five times, the price moves from $420,000 x 5 = $2,100,000 on reported profit to $600,000 x 5 = $3,000,000 on recast profit, a difference of $900,000. If the buyer rejects the $40,000 closed product line add-back, recast earnings fall to $560,000 and the price falls by $200,000 to $2,800,000.Case study
Seen in the real world.
This is a fictional illustration. Marlow Signage is an invented family firm whose owner prepared an add-back schedule listing 24 separate adjustments, from a boat described as a marketing asset to the salaries of two family members who no longer worked in the business.
The buyer accepted nine of the adjustments and rejected the rest, on the basis that the boat had no demonstrable link to revenue and that one of the family members had been performing genuine work. Recast earnings settled at $740,000 rather than the $910,000 the seller had proposed, and at a four times multiple that removed $680,000 from the offer.
The illustrative lesson is that an add-back schedule is a negotiating document, not an accounting one. Sellers who document each adjustment with evidence, and who leave out the ones they cannot defend, generally keep more of the value than those who present a long list and dare the buyer to argue.
Watch out
Common mistakes.
- Treating a recast as a licence to invent adjustments, when every add-back has to survive a buyer's evidence test.
- Confusing a recast with a restatement for error, which is a signal that the original accounts were wrong rather than simply presented differently.
- Forgetting the adjustments that go the other way, such as below-market rent or an unpaid family member whose replacement would cost real money.
Questions
People also ask.
Who prepares a recast in a business sale?
Usually the seller's corporate finance adviser or accountant, with the buyer's due diligence team then testing each adjustment before the price is fixed.
Does a recast change the tax the business pays?
No, because tax follows the statutory accounts and the tax return, while a recast is a presentational exercise for buyers, lenders or investors.
Is recast profit the same as adjusted EBITDA?
They are close relatives, but adjusted EBITDA also removes interest, tax, depreciation and amortisation, whereas a recast can be prepared at any level of the profit statement.
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