Why Business Brokers Recast Owner’s Earnings When Valuing a Business for Sale

When appraising a business for sale, brokers frequently make a financial adjustment known as “recasting” or “adding back” the owner’s earnings. This process is a fundamental part of presenting a business’s true earning potential and plays a key role in how buyers assess return on investment (ROI). Here’s why it matters—and how it works.

Clarifying the Owner’s Economic Benefit

Owner’s earnings are typically added back because they represent income that would be available to the buyer after acquisition. In many cases, this figure is a substantial component of the overall return and helps paint a more complete picture of the business’s cash flow. By isolating and reintegrating the owner’s remuneration, brokers highlight the underlying profitability that a buyer can reasonably expect to inherit.

Normalising for Non-Market Compensation

Business owners often pay themselves in ways that don’t reflect market norms. This can skew the business’s reported profitability unless properly adjusted:

  • Below-Market Wages: Some owners draw minimal salaries to reinvest in the business. This understates operational costs and inflates profit on paper.
  • Above-Market Salaries: Others may pay themselves more than a comparable manager would command. This artificially reduces reported earnings from a buyer’s perspective.

By recasting these figures to reflect fair market compensation, brokers provide a more realistic and consistent financial basis for comparison.

Adjustments for Managed Businesses

For businesses run under management, the broker will typically deduct a market-rate manager’s salary from earnings. This allows potential buyers to understand the operational costs if they intend to remain hands-off. Notably, managed businesses often attract stronger valuation multiples due to their scalability and reduced reliance on the owner’s direct involvement.

Building Buyer Trust Through Transparency

These financial adjustments serve a broader purpose: creating clarity. Standardising earnings across different businesses gives buyers a consistent framework to evaluate opportunities. It also increases confidence in the numbers presented, leading to more productive negotiations and fewer surprises during due diligence.

Key Insights

  • Owner’s earnings are recast to reflect the income a buyer can expect to receive.
  • Salary adjustments align compensation with market benchmarks, normalising the financials.
  • For businesses under management, market-rate management costs are deducted, often supporting higher valuations.
  • Recasting improves transparency and facilitates fairer, more informed buyer decisions.

In short, by adjusting for owner-specific earnings and expenses, brokers provide a clearer financial snapshot that aligns more closely with how the business will perform under new ownership. This not only enhances the credibility of the valuation but also smooths the path to a successful sale.