When you sell a business, show them the money.

Understanding Normalization (Recasting) of Financial Statements for Construction Businesses

If you’re a business owner in the construction industry—whether you run an HVAC company, a plumbing business, a roofing firm, or an electrical contracting enterprise—there’s a good chance that your financial statements don’t fully reflect the profitability of your business. Like many owners, you and your accountant may focus on minimizing the bottom line to reduce taxes, which is a smart strategy while operating the business. However, when it comes time to sell your business, this approach can work against you. Potential buyers want to see the true profitability of the business, which means you’ll need to “normalize” or “recast” your financials.

At Legacy Venture Group, we specialize in helping construction business owners through this process. Tampa business brokers understand that the financials you provide to a buyer need to demonstrate the real cash flow and profitability of your business—not just the numbers on your tax return. Let’s explore the key components of normalization and why it’s crucial to ensure a smooth and successful sale.

Why Normalize Financial Statements?

The goal of normalization is to adjust your financial statements to accurately reflect the true earnings of your business. As business owners, it’s common to write off many personal or one-time expenses through the business to reduce taxable income. While this is beneficial for saving on taxes, it often masks the real financial performance of the business, which is critical when presenting your business for sale.

Buyers are looking for consistency and clear cash flow, which means that your financials must provide a true picture of your business’s profitability. A failure to recast financials could make your business seem less profitable than it actually is, which can result in lower offers or difficulty attracting serious buyers.

What Gets Added Back?

Normalization involves adding back certain expenses that are not directly related to the ongoing operation of the business. These are typically expenses that have been written off for tax purposes but actually represent benefits to the owner or one-time, non-recurring costs.

Here are some common add-backs for construction companies:

1. Owner’s Salary
   Many business owners pay themselves a salary, which might be reflected in the financials as an expense. However, this salary is often discretionary. When recasting, this amount can be added back to reflect the true profitability of the business. For example, if you paid yourself a $100,000 salary, that amount can be added back to the bottom line.
2. Depreciation and Amortization
   Depreciation and amortization are non-cash expenses that reduce taxable income but do not affect the actual cash flow of the business. These amounts are often added back when normalizing financial statements.
3. Personal Expenses
   Many construction business owners may run personal expenses through the business. For example, a roofing company owner might use a company vehicle for personal use, or an HVAC business owner might charge personal meals as business expenses. These personal expenses can be added back, as they don’t affect the core operations of the business.
4. One-Time or Non-Recurring Expenses
   Sometimes, business owners make significant one-time investments in their business. For example, you may have remodeled your showroom for $50,000 or upgraded equipment. Since these expenses are not regular operational costs, they can be added back to reflect the ongoing profitability of the business.

Consistency Is Key

While recasting your financials is essential, it’s important to maintain consistency. Buyers will be wary of financials that show years of losses or minimal profitability followed by a sudden spike in income right before the business is listed for sale. The goal is to demonstrate a steady, consistent flow of earnings over multiple years. If you have inconsistencies, you need to be able to explain and prove them, such as showing receipts or documentation for one-time expenses.

For example, if your plumbing company had a large expense to upgrade your fleet of service vehicles one year, be prepared to explain that this expense won’t recur and that it doesn’t affect the long-term profitability of the business. Buyers appreciate transparency and documentation.

Work with Your Accountant

It’s vital to sit down with your accountant and go through your financials in detail. They can help you identify all the areas where adjustments should be made and ensure that your recasting is accurate and defensible. Remember, only include add-backs that you can represent and demonstrate with documentation.

At Legacy Venture Group and Tampa business brokers, we help business owners like you navigate the complexities of selling a construction company. Whether you’re in HVAC, roofing, electrical contracting, or any other construction trade, normalizing your financials is a crucial step in getting the best price for your business. Preparing and presenting your business in the best possible light will attract the right buyers and ensure a successful transaction.  learn more