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What exactly does the term 'cash flow' mean in the context of the ads on this site?

What exactly does the term 'cash flow' mean in the context of the ads on this site? 'Cashflow' is a term generally used to describe how revenue moves through a business. It can be described as good, bad, positive, negative, brilliant, horrendous even. It can’t be quantified by an actual number. Could the figures after the words ‘cash flow’ in the ads in this site refer to how much of the total revenue is received in actual green folding stuff? A huge red flag to the IRS? Help me out someone…I’m British…

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Answers (9)
Armin Laidre
ExitAdviser.com
Fast-track Your Business Sale
NV

In general, "cash flow" refers to a revenue or expense stream that changes your cash account over a given period. So it may be not the same as "revenue" or even "profit" because your cash account may not change, for example, by just issuing and invoice.

Sep 15, 2013
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Don, thanks yet again. You surely work this site! Ok, could we continue this by personal e-mail. I do mean to sell my business and I'm on here and other places doing research. In the event I decide to go with a broker perhaps we might chat? tim@thebritishfeedcompany.com.

Sep 8, 2013
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The BAF Group LLC
MD

TIm, it is not that simple, from my perspective - and that of many others, including lenders. "Rules of thumb" at a multiple of 2.5 is not in keeping with all businesses. Some businesses - like Gas Stations - can go for 1.5 times Cash Flow. But if you add in a profitable C-Store, the number comes up to 2.5, in some cases. If you have a business that has long term contracts, the multiple can be 3 or better. Some Technical businesses go for 4 or more. It all depends on the kind of business, the strength of the brand (if any), whether it is a franchise...yadda, yadda, yadda....

And Rules of Thumb do not really, always follow the business itself, in many cases. Most Restaurants, for example, can follow the 2.5 to 3 multiple Rule of Thumb. But we have one that has been examined by an SBA Lender, and the Lender would finance a qualified Buyer for a price that would equal 4+ times earnings, because of the strength of the Cash Flow relative to the volume of business. Working the numbers backwards from the Cash Flow/Loan Payment perspective and ignoring the multiples is usually your better bet.

Sep 8, 2013
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Again, my thanks Don, and also to you William. Good informative stuff.
So, once I accurately calculate the 'cash flow' of the business I am about to sell, it's simply a matter of factoring it then? Associates suggest 2.5 time the 'cash flow' would be a fair asking price? Anyone disagree?

Sep 8, 2013
William Bruce, ABI
William Bruce Business Sales & Acquisiti
Baldwin County, AL
Premium Broker

Here's an article I wrote defining cash flow.

William Bruce, President
American Business Brokers Association

Sep 8, 2013
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The BAF Group LLC
MD

I worried that my references to the American perspective would be viewed as a negative. The principles are the same, it is the specifics of the tax code that would be different. I spent a lot of time in the UK, and your comment on the common language is both noted and very well appreciated! Good day to you, as well.

Sep 3, 2013
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Don,

Thanks so much. I have that now. My wife is American and in this instance, as daily in our house, it's demonstrated that Britain and the US are, indeed, two nations separated by a common language!
Your advice is truly appreciated; have a lovely day sir!

Sep 3, 2013
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The BAF Group LLC
MD

The fact that you are British makes it a little more difficult to answer, from an American perspective, because Cash Flow is generally understood to relate to Profit, adjusted for Tax Deductions, one-time expenses and other costs of business that pertain to the Seller's own methods of doing business, but will not necessarily be borne by the Buyer. For example, if the Seller is making Loan Payments for purchasing the business himself, you (as the Buyer) will not be making those payments when you take over, because the Seller would have retired his own loan. So his payments are "adjusted" or "added back" into the Profit history, so that you can see what your own Cash Flow would look like, before you take your own deduction for you own Loan Payments. Cash Flow should ideally be Profit, before the Buyer's Debt Service (Loan) and personal Salary. HOWEVER, frequently Brokers and Sellers will compute things differently, so you need to question them about their methods, in each case. For a clearer, more detailed description - from the American perspective - take a look at our Blog post, on the subject: http://combrokerbusiness.wordpress.com/2012/02/07/cash-flow-what-the-heck-is-it/

Sep 3, 2013
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So, the 15 people who answered the two questions posted after this don't know the answer.....fishy eh?

Sep 2, 2013

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