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How are buyers evaluating cash flows and multiples through the recent downturn?

How are buyers evaluating cash flows and multiples through the recent downturn? Our company revenues were down 50% in 2009, but recovering now. 3 year average?

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Answers (11)
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Aug 17, 2017
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Hernando County, FL

With all do respect mr anonymous, WE (my team and I) almost thought about not replying to this statement of intent. However you made a few mistatements. We are not in the business of debating whether the sky is blue or not. As you seem to be quite stuck in your ways. I must admit we all have cracked a joke about this statement you have made. So first let me start by saying this. We answered your question in very vague terms. We do not know the factors.... it was clearly just an example. We do this everyday, so WHO do you think would know a little bit about this subject? Anyway....let us reiterate your statements. (1) We assumed cash flow was 50% because we were using the COGS method which is 2.25. Yes a little more than 50 % but for all purposes.....we dont know what kind of business. Our example would be like a general store in a state park. (2) "Gross sales are almost irrelevant"....your words.. THEY ARE VERY RELEVANT when looking at cash flow. (3) "A buyer/investor should ONLY look at their ROI.".......your words again.....I have an registered investor sitting right here and you should just hear what he has to say to that one. You made several more mis statements, but for all purposes.. I think everyone has the point. We wish you luck in selling your business. My advice to you.....quit trying to tell a cow how to make milk and learn how the cow does it......Your right about ONE thing.......CAVEAT EMPTOR Good luck and we wont be replying to you any more as we can tell just by the way you seem to debate with not just us but many...you may need to hit the books again to refigure your strategy.

Mar 14, 2010
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Hernando County, FL

WOW! so many oppinions. We are in the business of aquistions.(meaning we buy business). In the late 90's the standard was three year average. However, the standard as of today (march 14,2010) is based on the previous fiscal year. Businesses are only worth the PROFIT they assumed in fiscal 2009. Many have Cash flow and Profit Misunderstood. So in answer to your question Cash flows are assumed to be 40 to 50% of Gross Sales. So in essence...Profit margin/Profit/Cash flow are all evaluated as a buyer. Bottom Line......If your business does 500.000 in Gross sales. It would sale around 129,000 depending on the factors. Hope this was informational for you. Not what you wanted to hear im sure. The business that dont sell are the ones that are confused as to what the business actually does. We have seen some on here for years, due to thier misconception.

Mar 14, 2010
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As a potential buyer, i would not pay for a business what is worth three years ago. In 2006 we looked at condos on Tybee Island. They had some great condos that sold for around 800k. By the end of 2008 they were being sold for 300k. I would hold onto the business until it picked up if I expected top dollar.
I don't know what you are looking to get but how many years of cash flow would you expect? I once saw an accounting firm with an asking price of 2 million that had 150k cash flow and I kept on wondering why somebody would even consider paying that price.
Not that I would be interested in accounting but I have been approached with deals for restaurants/ bars where the asking price was 465k and the place wasnt even open because of a fatal shooting.
As an experienced buyer (mind you my expertise is restaurants) I would never pay more then 2 years cash flow and since I have cash I would really like to stick at 1.5 cash flow. That's restaurants, though.
Now , I am really not trying to be insulting but I agree with Don about, history, blood sweat and tears not meaning anything (for the most part.) Its a whole new world and I want to know what you recently made. It's like a stock -- if it is worth 10 dollars now but was worth 20 last year I woukld give you 10 for it.

Mar 11, 2010
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The BAF Group LLC
MD

No one here would ask for confidential information. I can see why you had difficulty with your prior Borkers. About 70% of our business comes from satisfied Buyers, Sellers, Attorneys and Accountants. If you will look back, my comments were initially, completely upbeat. And I was the first to suggest a weighted average. Use whatever you like. We use 50%/30%/20%.

But the sad fact is that we do not believe mutiples are a very satisfying way to look at this - partially for the very reasons you cited: They don't tell the whole story. And partially because they are highly misleading.

I note that you have changed your signature from KS to Anonymous. Your paranoia shows through. We are not "trolling"; but if we were, what does that say about you, "trolling" the Internet, looking for free information?

That being said, throughout the months that this Community has been active, we have provided a fairly large amount of FREE, helpful advice in this column, and were willing to do so when I suggested you call.

You now have the information you sought. Have a great day.

Mar 11, 2010
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The BAF Group LLC
MD

You are only reading what you want to read which, in this case, is the negative. If you look at several of my comments, I said that the information you provided does not give any way to rationally, confidently provide you with pricing. The kind of narrative you are suggesting is EXACTLY what I would need to justify pricing. Yes, a 25-year old Company can have positive attributes.

A 25-year history can also be a detriment. But I would not know that by only reading the numbers you gave. If it is 25 years of coin-operated phones, it would be worthless. If it is 25 years of any kind of technology that is potentially on the brink of extinction, it would be worthless. If it is 25 years of selling nothing but Chrysler products, it would be almost worthless. If it is 25 years of one or two people who run the show, are the face of the business, do most of the selling and on whom customers solely rely, it has a VERY low pricing capability. If it is a motel, there could be 25 years of "deferred maintenance", which means the Buyer has to put millions of dollars into the facility to maximize any income, which then erodes your pricing.

That is why earlier I said, "Call me." READ WHAT I WROTE: "I can't answer that, without seeing the entire picture. When you ask these things in the absence of a full picture, you will get a stilted answer. And that can go either for you, or against you." Read that last sentence again, right now. The lack of information can be misleading, and "...can go either for you, or against you."

You stated that, "As a seller, I would expect a business broker to be able to communicate that to a prospective buyer." As a Business Broker, I would expect any Seller with whom I would agree to work, to provide me with honest, complete answers. It is obvious you don't want fact, you want some one who will tell you only what you want to hear. For free.

Good luck.

Mar 11, 2010
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The BAF Group LLC
MD

I can't answer that, without seeing the entire picture. When you ask these things in the absence of a full picture, you will get a stilted answer. And that can go either for you, or against you.

This sounds cruel, but I don't mean it to be so: Whether it is a 25-year old Company, or a 25-month old Company means relatively little to the Buyer. The numbers will largely dictate the price, regardless of the methodology you use. History, sweat and blood...none of that means anything unless it translates to cold, hard cash. If the age of the Company were to be addressed with the Buyer as a reason to increase the price, the Buyer would probably respond that it should be more profitable, with that many years of success behind it.

And a Bank that might fund the acquisition is going to be even harder on you. In most cases, they don't even look at narrative; they solely look at the past three (3) years of historical financial data, and two (2) to three (3) years of the Buyer's Pro Formas. Who you are, who founded the Company, what was done to get it to where it is means nothing to the Lender.

Again, I am not trying to be insulting. I am trying to be realistic.

Mar 11, 2010
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The BAF Group LLC
MD

Why don't you call me about this? Don Barrick at (410) 715-0700.

Mar 11, 2010
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Biz2Credit LLC
New York County, NY

We at biz2Credit ( www.biz2credit.com) do a lot of business acquistion deals. It depends on the weighted mean of topline and bottom line as well as kind of business and the state one is in. Businesses in states like CA are being valued less compared to similar businesses in NY etc

Mar 10, 2010
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The BAF Group LLC
MD

When you are doing that kind of analysis, you would normally use a weighted average, with the heaviest weight applied to the most recent year. The difficulty is in determining whether the downward trend has bottomed out, so you would ideally examine month-to-month P&Ls for the past years, in an effort determine current trend. Or, you can just wait until better times arrive...

Mar 10, 2010

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