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Determining Income from a Biz listed for sale? "Cash flow" doesn't do it. Any tips?

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Answers (7)
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The BAF Group LLC
MD

Sorry - as you your last question about Rules of Thumb, they are fine. When they work. And sometimes, they don't. Getting an NDA signed and getting the P&Ls is about your best bet.

Sep 22, 2010
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The BAF Group LLC
MD

Michael, you are right: Taxes are not discretionary. And remember that I am not an Accountant - I don't even play one on TV! - but let's suppose that you have a large amount of money paid annually in Taxes by the prior Owner, and he has no Debt Service. The Income Taxes are added back into the Cash Flow, but you are not going to treat that Cash Flow as purely Profit. You are going to look at that and do a pro forma that adjusts for your Debt Service in buying the Business, and the Interest is theoretically deductable. So, while you add Interest to your Expenses, these are deducted from Tax liability, which shows you what your Net should ideally be - assuming your Revenue and other Expenses are similar to the past Owner's. You still pay Taxes, unless your Interest and other deductable Exspenses overcomes the Tax liability. It is a very delicate issue, and you have to really roll up your sleeves - and that of your Accountant - and study the heck out of the numbers.

And this is why you NEED an Accountant. (Are all you CPAs listening to me!?!)

There are other examples of this kind of thing that a Broker can and does do. I had one Seller that was paying three of his kids on the Payroll, and none of them had ever stepped into his place of business, which was a manufacturing plant. They were four and five years old, as I recall. I found that money - not a CPA! But that was a gross kind of issue that any idiot - even a Broker - can find. To really refine the numbers in any kind of even a moderately complex deal, you absolutely need to see your Accountant. This takes nothing away from any reputable Broker, in spite of my sarcasm. But we all have our limitations.

I hope this helps.

Sep 22, 2010
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Thanks, Don.
Your first answer could be "spot on." Let me expand my question to make sure.
One of my key questions in looking for a business to buy is: Will it generate enough income to support the family. It seems a waste of everyone's time to go thru NDA's, financials, tax returns to begin getting an answer to this.
"Cash flow" reported in the listings is usually EBDTA+owner's salary+interest+ depreciation, "Owner's Discretionary Cash." doesn't seem to provide the answer. I'm a seasoned marketing man, not an accountant, but last I checked, taxes aren't discretionary, interest usually isn't, and it's the tax effect of the depreciation (not the dollars depreciated) that contributes to owner's cash.
So, while I certainly agree that an accountant will be needed to review/confirm/finalize a purchase, I was hoping that there might be some rules of thumb to preliminarily estimate owner's income.
Your further thoughts and advice?
Thank you.
Michael

Sep 22, 2010
Buy-a- Company

Sid Diki: That is ridiculous!

Business brokers are (usually) not accountants or CPAs, and are typically not trained to properly analyze the cash flow. A good broker will tell you that they are NOT experts, and refer you to a qualified CPA.

You call yourself a professional broker, and tell people to avoid accountants and attorneys? Shameful.

Every buyer and every seller should engage accountants and attorneys to protects their life savings. Hiring a broker, on the other hand, is optional.

Sep 22, 2010
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The BAF Group LLC
MD

Michael, I am a Broker - and I disagree with the last writer. You do not need a Broker, as much as you need an Accountant, for determining Income. "Cash Flow" is the most critical real measure for a small business acquisition. As I said in my prior commentary, I don't understand your question. "'Cash flow' doesn't do it," as you termed it, has any number of ways to be interpreted. But an Accountant is key, to crystalizing your Cash Flow issues.

Sep 22, 2010
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Freedom Business Brokers
Orange County, CA

Michael
If you are unable to determine the value of a business by cash flow then go with the "gross flow"
or by seeing the buying invoices and the add the margin of profit to it.
Best thing is hire a broker who represent you but not an accountnt or attorney as they analyze so much to justify their fee that the bigger picture is lost and you are unable to achieve or accomplish any thing and wil stillwill be liable to pay their share.
In the business buying this is the most difficult step to ascertain the realistic value as there are so many factors to take into consideration that you may easily skip one step and reach to wrong calculations or conclusions.
sid0653@hotmail.com

Sep 22, 2010
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The BAF Group LLC
MD

Not certain what you mean - not enough info. But all you will get there is the most brief synopsis; minimally, you need to have a copy of P&Ls and Tax Returns, to really determine Income.

Sep 22, 2010

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