Recasting is the process of adjusting a company's reported financial statements to reveal its true earning power to an owner, adding back the owner's salary, personal expenses, and one-time costs to arrive at seller's discretionary earnings (SDE).
Worked example
| Line | Amount |
|---|---|
| Reported net income | $150,000 |
| Add back: owner salary | +$130,000 |
| Add back: owner's personal expenses | +$40,000 |
| Add back: one-time legal & setup costs | +$30,000 |
| Recast SDE | $350,000 |
The same business is worth far more at a 2.7× multiple on $350k SDE than on $150k of reported profit.
Why it matters when buying a business
Sellers minimize reported profit to reduce taxes, so the raw statements understate value. Recasting the numbers into SDE, via legitimate add-backs, is how you value the deal. But verify every add-back in quality of earnings; aggressive or fake add-backs inflate the price you'd pay.
