When buying a business, the owners cash flow, or sellers discretionary earnings, is one of the most important aspects of valuing the company. In an owner-operated business, this number refers to all of the income and benefits available to a working owner. The owners cash flow is often advertised when a business is for sale, but all buyers must do their research to ensure that this number is calculated correctly. Continue reading for tips on how to know if an owners cash flow is accurate before buying a business.
First, be sure that the reported owners cash flow is current and doesn’t reflect a prior time when the business was performing differently. If the business recently had an uncommon event that caused a spike or drop in owners cash flow, it may be the right decision to use the average of the owners cash flow over a few years for a better estimate.
Take a look at the company’s payroll and the number of employees on the staff- are they missing workers? This is quite common for businesses with owners that are working overtime, such as 80 hours a week. This will significantly change the owners cash flow, so be sure to deduct the salary of one person to replace some of these hours. Also, the current owner may have a family member working for no salary, such as a spouse that is in charge of bookkeeping. If this is the case, deduct the cost of a bookkeeper from the owners cash flow number.
The reported owners cash flow should also be adjusted to the current market rent. If the current owner owns the real estate, the rent being paid may not match the market rent. If the owner is the landlord, ask for the rent price that he/she is expecting to receive. If the property is being sold with the business, the rent adjustment will be based on the revised real estate expenses, including mortgage, property tax, and other expenses that will change.
Buying With Atlantic Business Brokerage, Inc.
At Atlantic Business Brokerage, our mission is quite simple; we help sellers sell businesses, and buyers buy businesses! Over the past 30 years, ABBI has facilitated the sale of countless commercial properties, businesses, and franchised locations. With our unparalleled knowledge of the business purchase and sale industry and our network of contacts, we offer services to both buyers and sellers that no other brokerage firm can match.