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The Value of a Professional Estimate of Cashflow in the Sale of a Business

IBA, as the premier business brokerage firm in the Pacific Northwest, is firmly established as a respected professional service firm in the legal, accounting, banking, mergers & acquisitions, real estate, and financial planning communities.  Periodically, we will post guest blogs from professionals with knowledge to share for the good of owners of privately held companies & family owned businesses.  The following blog has been provided by Allan VanderHamm of Berntson Porter & Company, PLLC (www.bpcpa.com).

The Value of a Professional Estimate of Cashflow in the Sale of a Business

Cash flow is one of the most important factors in a business exit. Today, we look at why securing a professional estimate of your company’s cash flow is crucial to the success of your Exit Plan. All buyers, whether an outside third party or an insider (family member, co-owner, or key employee), will use cash flow as a way of measuring or confirming the value of the companies they buy.

While there are many definitions of cash flow, the one that we often use is free cash flow. Free cash flow is the portion of the annual net cash flow from operating activities that remains available for discretionary purposes after the business has met its basic financial obligations. In this discussion, the “discretionary purpose” is the buyer’s purchase of or return on investment for the owner’s interest in the company.

If you are contemplating a sale to insiders, remember that they likely do not have enough cash to finance the purchase. It may be the future cash flow of your business (once you leave it) that funds your buy out. As you can see, in transfers to insiders, cash flow can be both the measure and the means of ownership transfer. As such, it is important to estimate future cash flow as accurately as possible. This is not a “back of the napkin” exercise; a thorough analysis will give you more confidence in your plans for the future.

Once you have an accurate professional estimate of future cash flow, you can assess various Exit Paths, and your advisors can design an exit strategy that puts as much of that cash flow as possible in your pocket. Accurate cash flow estimates can also minimize the taxes you pay upon an ownership transfer. Remember, every dollar the IRS takes is one dollar less paid to you, regardless of whether the buyer or seller pays the tax.

Let’s assume for a moment that the company’s cash flow estimate indicates that it cannot support all of your Exit Objectives. You will then explore alternatives to your original plan and answer important questions:

  • Should you delay your departure date?
  • Should you focus your attention on a third-party sale and, if so, are a higher purchase price and/or more cash upfront possible?
  • Should you shift your focus to building cash flow and business value before you begin to sell ownership?

Securing an accurate estimate of future cash flow can help prevent you from choosing a dead-end Exit Path. It can give you confidence that you are on the right track or uncover areas that require more work before you can exit the business. For most owners, calculating estimated future cash flow is an integral part of creating a successful Exit Plan.

For more information about obtaining an accurate cash flow estimate, contact us today. We can help guide you through the process.

Allan VanderHamm, CPA, ABV, CVA, CM&AA, CExP, is a Principal and the Director of Business Transition and Valuation Services at Berntson Porter & Company, PLLC, a consulting and planning CPA firm in Bellevue.   Allan’s practice focuses on designing and implementing comprehensive owner exit plans, completing successful merger and acquisition transactions, and preparing effective business valuations.  If you have questions about the content of this article or any area relevant to Mr. VanderHamm’s expertise please contact him at (425) 454-7990 or avanderhamm@bpcpa.com.

IBA, the Pacific Northwest’s premier business brokerage firm since 1975, is available as an information resource to the media, business brokerage, and mergers & acquisitions community on subjects relevant to the purchase & sale of privately held companies and family owned businesses.  IBA is recognized as one of the best business brokerage firms in the nation based on its long track record of successfully negotiating “win-win” business sale transactions in environments of full disclosure employing “best practices”.