Recasting historical financial statements

The key step when preparing for a small business valuation is to adjust the subject company’s historical financial statements. Business owners have considerable discretion in deciding what expenses are charged to the company, how the business assets are managed, and what capital expenditures are incurred.

The goal of recasting or normalizing the financials is to construct a financial picture that reflects the true earning power of the company. You will generally need 3–5 years of historical financial statements to do this.