Handbook of Business Valuation

By Thomas L. West; Jeffrey D. Jones | Go to book overview

CHAPTER TEN
Recasting Financial Statements
DAVID M. BISHOPWhen reading this chapter, keep in mind I have made an effort to avoid excessively duplicating information covered in other chapters. Therefore, I recommend you read this chapter in concert with those chapters that deal with financial analysis and valuation. Further, given the limitation of the chapter format, certain assumptions and other constraints must be established. Among these are:
1. Though many of the considerations are applicable to both, we will assume a business and not a professional practice.
2. When discussing earnings, we will concentrate on pretax as opposed to after-tax. Many closely held businesses tend to be either proprietorships, partnerships, or S corporations, each of which finds the owners taxed as individuals. There are significant differences within the individual tax rates, and without knowing a given taxpayer's taxable income from outside the business, the applicable tax rate would be uncertain. A pretax basis permits the seller, buyer, and their respective agents to view the business on a like basis. Therefore, we will assume a pretax basis; however, it is important not to lose sight of the fact that each individual buyer may look at the tax aspects and other synergies applicable to him or her. This may well affect the level of value applicable to the buyer.
3. We will look at the basic balance sheet, income statement, and statement of cash flows.

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