Recast or normalized financial statements are a restated version of a business's historical income statements that reflect what the business would earn under a new, market-rate owner — stripping out items that inflated or deflated income due to the current owner's personal decisions. Recasting involves three categories of adjustment: (1) adding back the owner's compensation above market-rate replacement cost, personal benefits, and discretionary spending; (2) removing non-recurring items like one-time legal fees, extraordinary repairs, or pandemic subsidies; and (3) adjusting for related-party transactions at non-arm's-length prices (a family member paid below market, a related-party lease above market, etc.). The result is a normalized income statement that forms the basis for applying an earnings multiple to determine value. Sellers and their brokers typically present recast financials to support their asking price. Buyers and their advisors must critically evaluate every add-back claimed. CRA scrutinizes add-backs in personal tax situations, but in an acquisition context, the question is simply: will this cash flow appear for the buyer, or was it specific to the current owner?
A Maple Ridge auto body shop's T2 shows $95,000 net income. The seller presents recast financials claiming $265,000 in SDE after adding back: $90,000 owner salary, $35,000 owner truck and insurance, $22,000 salary to the owner's spouse (who does no real work), and $23,000 in one-time equipment repairs. The buyer's advisor accepts the salary and truck but rejects the spouse salary and argues the equipment repairs are ongoing maintenance, recasting SDE to $220,000.
Ali Sedighi uses this concept on every valuation engagement — cross-checking seller claims against third-party financial data and Canadian comparable sales before advising any buyer on price.