This article is one of a series that offers insight and guidance into the process of buying selling or valuing a business. Whether you want to buy, sell, or appraise the fair-market value of a going-concern business, these articles provide specific guidance and references to help you accomplish your goal.
Seller's Discretionary Cash Flow
(excerpted from the book "Transaction Patterns" by Toby Tatum - with permission)
Seller’s discretionary cash flow is probably the best measure of profitability for the purpose of evaluating the financial performance of small businesses and is a concept that is used extensively throughout the field of business brokerage and business valuation. This term is also interchangeable with Mr. Brown's term of Available Cash Flow used in his writings and software (BizPricer Business Valuation Software).)
For those unfamiliar with this particular performance measurement, it is determined by adding to pre-tax net profit the wages for one principal owner/manager (or salaried manager) including bonuses and any personal insurance premiums paid through the business. To this total is added the non-cash expenses of depreciation and amortization plus all interest paid on long-term debt. Additionally included are all expenses not necessary for the operation of the business generally categorized as “owner perquisites” which typically include such things like the owner’s personal auto expenses, travel and entertainment and so forth enjoyed by all of the owners and their family members. If the business pays a wage to other working owners or members of the owner’s family, only that portion of their wages and benefits exceeding fair market value (i.e., the amount necessary to attract and hold a non-owner employee to do the same job) is to be included in the definition of seller’s discretionary cash flow. Likewise, if additional owners or their family members are paid something less than a fair market value wage, then the difference between a fair market value wage and what they are actually paid must be subtracted from the total. And finally, any non-recurring expenses (not capital expenditures) such as a one time uninsured loss, an extraordinary repair expense and costs of that nature should be added to the total and non-recurring earnings subtracted.)
If you would like to learn more about Toby Tatums the book "Transaction Patterns" please click here.
About Toby Tatum
Toby Tatum is an active business broker and business appraiser and is a member of the International Business Brokers Association from which he has earned the designation Certified Business Intermediary and he is a member of the Institute of Business Appraisers from which he has earned the designation Certified Business Appraiser.
The author is also an experienced speaker and author on topics including the selling and buying of business, business management and strategic planning. He has published articles in newspapers and trade journals, and he is a former columnist for the Reno Gazette-Journal where he wrote column about buying, selling and valuing small business. In addition to Transaction Patterns, Mr. Tatum has also authored the book, Anatomy of a Business Purchase Offer.
If you're considering buying, selling, or determining the value of a business, please take a look at some of the excellent books, reports, and software we have at Business Book Press to help you achieve success. For example:
The Business Reference and Pricing Guide is the bible of the business brokerage world. If you're a shrewd business buyer or seller, you will want this book to learn what just what the business broker knows. It will pay you big dividends throughout every aspect of the purchase and sale process. Learn more about it...
BizPricer Business Valuation Software is an accurate and inexpensive resource for prospective business buyers and sellers (and business brokers) who want to know the fair market value of a business. No financial expertise or specialized knowledge is needed. Save hundreds to thousands of dollars over hiring an appraiser to provide you with a similar result. Learn more about it...
Preparing A Business for Sale provides business owners with an understanding of the process they need to know to sell their business for the most money. Contains hundreds of little known tips, ideas and strategies to maximize the selling price of a business. Learn more about it...
Strategies for Successfully Buying or Selling a Business is our bestselling book. It has been recommended by Kiplingers Personal Finance Magazine, the BottomLine Personal Newsletter, and has been awarded the Best Business Book of the Year Award from the North American Bookdealers Exchange (NABE). Learn more about it...
Anatomy of a Business Purchase Offer provides you with all of the practical hands-on knowledge you need to make a successful purchase offer to buy a business. The author uses an actual Purchase Offer form to show you exactly what needs to be written and why! He details all of his recommendations in a line-by-line format for each and every aspect of the purchase offer. Learn more about it...
The Business Buyer's How-to Kit: We've assembled a specially-priced Kit with all of the key information you'll need to know to successfully buy a business.
The Business Seller's How-to Kit: We've assembled a specially-priced Kit with all of the key information you'll need to know to successfully sell a business.