Recasting
Recasting is the process of rebuilding a business's reported financial statements and tax returns into a normalized picture of ongoing earning power, reclassifying and adding back owner-discretionary, non-recurring and non-operating items so a buyer can see what the business would produce under new ownership. Recasting produces the SDE or Adjusted EBITDA figure a business is actually priced on, because a tax return is prepared to minimize taxable income within the rules and its reported net income is almost never the number a business sells against.
Also called Financial recasting, Recast, Normalization of financial statements · Last updated 2026-08-07 · All 24 terms
What a recast consists of
A recast is a document-driven exercise, not an opinion. The working set for a lower-middle-market business is three years of business tax returns — Form 1120 or Form 1120-S for a corporation, Form 1065 for a partnership or multi-member LLC, Schedule C of the owner's Form 1040 for a sole proprietor — plus internal profit and loss statements for the same years and year to date, general ledger detail behind any account being adjusted, the Form 4562 depreciation schedule, payroll registers, and any related-party lease or note.
The sequence that holds up under scrutiny is tie out, classify, adjust, evidence.
The tie-out step is the one most often skipped and the one that most often destroys credibility. If the internal P&L shows $2,400,000 of revenue and the return shows $2,310,000, that $90,000 difference has to be explained before a single add-back is discussed.
- Tie out: reconcile the internal P&L to the tax return for each year and explain every difference before adjusting anything.
- Classify: assign every line to a category (revenue, cost of sales, operating expense, interest, depreciation, tax, other income, other expense) so subtotals mean the same thing across years and no money falls out of a total.
- Adjust: apply the add-backs one line at a time, with the amount and the reason stated for each.
- Evidence: attach the document that proves each adjustment, because a buyer's accountant will ask for it in diligence rather than at the LOI stage.
A three-year recast, summarized
Recasting is done per year, and the year-to-year pattern is as informative as the totals. A landscaping company:
2023: reported net income $88,000, add-backs $302,000, recast SDE $390,000.
2024: reported net income $121,000, add-backs $318,000, recast SDE $439,000.
2025: reported net income $64,000, add-backs $415,000, recast SDE $479,000.
The 2025 jump in add-backs is not automatically a red flag, but it demands an explanation. Here, $96,000 of it is a roof replacement expensed rather than capitalized, a genuine one-time expense — and one a buyer will test against the invoice and the two prior years. Had the increase come instead from a larger owner salary or a wave of newly discovered personal charges, a buyer would discount it.
Buyers rarely price off the most recent year alone. Weighting 2025 at 50 percent, 2024 at 30 percent and 2023 at 20 percent gives representative SDE of ($479,000 x 0.50) + ($439,000 x 0.30) + ($390,000 x 0.20) = $239,500 + $131,700 + $78,000 = $449,200. At a 3.0x multiple that is $1,347,600, or $89,400 less than pricing off 2025 alone. Which weighting applies is a negotiation, and stating yours explicitly beats burying it.
Recasting is not creative accounting
The objection every seller eventually hears is some version of "you are making the numbers say what you want." The answer is that a recast changes nothing about the tax return and nothing about what was actually spent. It relabels expenses the buyer will not incur, on the record, with each item traceable to the general ledger line it came from. The return still stands as filed; the recast sits beside it as a bridge.
The line that must not be crossed is between historical and hypothetical. Recasting removes items that actually occurred and actually will not continue. A pro forma adjustment models something that has not happened at all, such as revenue from a contract signed after year end or savings from a consolidation the buyer intends to execute. Both can appear in a sale package, but they belong in separate schedules with separate labels, and a pro forma line hidden inside an add-back schedule reads as an attempt to slip one past the reader.
Recasting and normalization are used interchangeably by most brokers, with normalization the more common term in formal valuation literature. Where a writer draws a distinction between them it is one of emphasis rather than substance — see normalization.
What makes a recast survive diligence
Every recast is eventually re-performed by someone whose job is to find the weak lines, whether that is the buyer's CPA or a formal quality of earnings provider. Three habits predict which recasts survive.
Traceability. Each figure should point back to the form, page and line it came from. When a buyer asks where the $96,000 came from, the answer should take thirty seconds, not a weekend.
Consistency across years. If a category was treated as an add-back in 2024 it must be treated the same way in 2023 and 2025, or the trend line is manufactured. Year-over-year swings on the same account, and accounts that vanish between years, are what a reviewer looks for first.
Restraint. The schedule that gets accepted is usually the one that leaves marginal items off. An aggressive recast rarely raises the price; it raises the number of hours a buyer spends questioning the whole file, and it moves the argument from price to trust.
Where this shows up in CastBack
CastBack recasts a seller's tax returns and profit and loss statements line by line, adding back depreciation, amortization and interest expense automatically while flagging owner compensation, income tax and discretionary-looking operating expenses for the broker to confirm, and it keeps the form, section, page and line each figure was extracted from so any number can be traced back to the source document. See how a recast is produced.