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What is the TRUE definition of cash flow?

I see many gas stations for sale advertising cash flows well over 200K. Is this a legitimate amount for the potential salary for an owner? Is there any owners or financial advisers with incite on this topic?

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We are financial consultants to a group of investors whom we have their consent to manage their funds which is in our custody for cooperation in joint venture business investments.

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Jul 4, 2017
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Landscaping/Auto Repair/Business Broker
President
Oakland County, MI

Cash flow is not salary. Cash flow or SDE (seller's discretionary earnings) consist of the total cash benefit to the owner of the company. Start out with companies profit (before depreciation and interest have been subtracted) Add to that anything that is a benefit to the owner including:
Owner salary
Wife salary (if wife is not actually active in the business)
Company car also used for personal use
Personal meals and entertainment (that have been written off, ahem, as company expenses)
Company cell phone that is also used for personal use
ANYTHING else the owner is taking out of the business under the guise of "business expenses"

Some are harder to actually prove than others. Chris

Jul 12, 2011
William A. Price
www.growthlaw.com
Business Lawyer
DuPage County, IL

A less general answer, specific to gas stations: Remember that you have two businesses here. One is a small food and convenience store, and you can check purchases costs from the distributor or other suppliers item by item versus what the sales tapes (and inventory counts) show went out, as well as payroll, insurance, and other hard costs to see what was made.

The second is a gas and oil business, and similar calculations can give you historicals. You'll need to look hard at market competition on your proposed site's corner and area, sales taxes at your site vs anything within an hour or half hour's drive, distributor/franchisor rules on what you take and what they keep, and other things you should ask gas station owners and operators about (after enough drinks or talks to be sure they're honest.) The margins can be terrible, or reasonable -- but they won't be easy to estimate if you don't know the business over time.

One final thought: the minimum wage managers and others who run the place are your best asset, and also can rob you blind...So be prepared to be an active owner, and see how other owners get and verify they have reliable people.

Hope this helps,

Bill Price

William A. Price
Attorney at Law
www.growthlaw.com

Jul 10, 2011
William A. Price
www.growthlaw.com
Business Lawyer
DuPage County, IL

Two answers are equally true:

(1) Will you bring in enough to pay the IRS and the creditors who will or could shut you down this month if they aren't paid?

(2) The accounting definition, which is one of the ways of looking at the numbers in a business, see, e.g., http://www.accountingcoach.com/online-accounting-course/06Xpg01.html

Hope this helps,

Bill Price

William A. Price
Attorney at Law
www.growthlaw.com

Jul 10, 2011
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The BAF Group LLC
MD

Cash Flow, as it is used in selling a business, is actually not a technically correct label. The more correct term should be SDC, or Seller's Discretionary Cash. And this applies to small business, rather than large corporations. Keep in mind that the average small business Owner, to some degree or another, uses his (or her) company as an extension of his checkbook. A major reason for this, they claim is to reduce Tax Liability. That means that there are far more potential "adjustments" or "add-backs" to EBITDA than the large corporation might experience. (You don't normally find a major, public company CEO using company money for personal gain, unless you are the CEO of Tyco and are desperate to buy a $7,000 shower curtain...but I digress...)

For small businesses, SDC would include EBITDA, in many cases plus any additional one-time expenses. If, for example, the Seller put up walls in the office and wrote it off at once, reather than depreciating it, that might be added back. It is a one-time expense that you, as the Buyer would not need to spend money on, in successive years. If a restaurant Seller is taking home $100 a week in "personal use" goods, a Seller, his Broker or his Accountant might also want to add that back. It is legitimate, but how do you prove it?

Another example of a legitimate adjustment is with a manufacturer I once represented. I questioned the amount and distribution of Salaries. He said his grandchildren were on the payroll. I wanted to know if they planned to stay with the company, or whether they needed to be replaced; I asked what roll they played and he said, "Just that; they play." They were 5 and 7 years old, and this was his way of funding their college plans. Those amounts were legitimately adusted by adding them back into the EBITDA. I have no idea whether this was a sound Tax strategy on his part, but it was what he wanted to do. This is where the "D" or "Discretionary" part of the SDC comes in: It is up to the Small Business Owner's Discretion, as to how some of these funds are spent. In another situation, I sold a very large Deli, and the Deli's son was earning $75,000 per year - to make corned beef sandwiches! He was not managing anything. At that time, I know the Seller could have replaced his son with a $6 per hour worker, but that was his discretionary decision.

The problem with some of this is that some Sellers, Accountants and (yes,) Brokers use too much "discretion". That is why I said in my prior comments that SDC or "Cash Flow", as it is used in this environment, needs to be used carefully, and only as a barometer - not as gospel! If you are given a Cash Flow or SDC number, ask for a detailed explanation of the adjustments. You can usually see what is rational and what may be bogus. And even if it is rational, just like the example above with "personal use", is it traceable?

Finally, again as it is used as a label in selling a business, "Cash Flow" is the Net, after all expenses EXCEPT Debt Service, (what you will be paying for any loan you take out to purchase the business,) and sometimes, the Owner or Manager's Salary. You have to check to be certain whether they added that Salary back completely, or not.

And yes, it is a legitimate amount for a good station. But you have to check to make certain the math is correct and they are being honest with their representations. Many times, Business Owners and Brokers will give you numbers that are based on "potential", rather than reality. You DO NOT want to buy potential!!!

Jun 29, 2011

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