Buying A Business? Get To Know These Three Words

If you’re planning to buy a business I have three words for you: net cash flow. It’s the most important factor to consider. Once you have prospective companies lined up for purchase, identify which one is generating the most consistent cash flow, and determine the likelihood it can be maintained in the long term. It’s like taking the pulse of a firm’s financial health.

Bricks-and-mortar businesses generally command two-and-a-half to six-times earnings valuation. Service-based companies are historically worth less, but cash flow is a key determinant on the multiple. What about profit, you ask? Consider this example:

A company is not profitable at the surface but its normalized cash flow is $500,000. Check the numbers. The owner might be drawing a $300,000 a year salary, with $100,000 funneled to each of his two children. On the flip side, a business has $500,000 in profit on the books but far less future cash flow. A major client may have failed to renew a contract, which would be an indicator of current and potential future problems. Buyer beware.

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Buying A Business? Get To Know These Three Words:

For additional information regarding Florida business sales, acquisitions and valuations, please contact Eric J. Gall at info@buysellflbiz.com or 239.738.6227. Also, visit our Florida Business Exchange website at www.fbxbrokers.com and my personal website at www.buysellflbiz.com.