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BayState Business Brokers Blog

Owners Cash Flow - What it is and why it is the most important number if you are buying or selling a business.

Posted by Marc Gudema on Wed, Jan 24, 2018 @ 02:33 PM

If you are going to sell a business or buy a business, it is important to understand Owners Cash Flow and how it is used to value a business.  In most small business sales, the seller is operating the business and the buyer plans to do likewise. Because of this, the best measure of the earning power of the business is the total income and benefits available to the owner, not the reported net profit of the business. In many small businesses, the owner is not trying to maximize net profit. The owner is trying to take out as much as possible in tax deductible salary and benefits. When buying or selling an owner-operated business, it is important to understand, and know, the Owners Cash Flow of the business. This is the best measure of the earning power of a small business.

Owners Cash Flow Defined
Owners Cash Flow is defined as the income before deducting the primary owner's compensation and benefits, other discretionary, non-operating, or non-recurring income or expense, depreciation, interest, and taxes. This is also referred to as Sellers Discretionary Earnings. This is the amount of money available to pay the buyer an income, pay off debt, and provide for capital to operate the business. In order to accurately calculate Owners Cash Flow, we use tax returns, income statements, and other financial records.

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Tags: buy a business, sell a business, owners cash flow

Buying or selling a business?  Be sure the owners cash flow is accurate.

Posted by Marc Gudema on Wed, Jan 17, 2018 @ 10:00 AM

When an individual is buying a business, the owners cash flow (also called sellers discretionary earnings) is usually the most important number in terms of valuing the business.  In an owner-operated business, the owners cash flow is all of the income and benefits available to a working owner.  These are the salary and discretionary benefits (not needed for the operation of the business), and net income.  In addition, depreciation is added back because it is not a cash expense and interest is added back because it is assumed the business is sold free and clear of debt.  In other words, owners cash flow is the EBITDA plus owner’s salary and benefits.

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Tags: owners cash flow

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