Part 1: Cash Flow
When business owners are preparing to sell their businesses, there are many ways they can make themselves attractive to buyers. As we represent many current and new business owners in Colorado, we have compiled the top five ways sellers can make themselves attractive to buyers. In Part 1 of our series, we will focus on Cash Flow.
When business owners are preparing to sell their business, there are many ways they can make themselves attractive to buyers. As we represent many current and new business owners in Colorado, we have compiled the top five ways sellers can make themselves attractive to buyers. In this issue, we will focus on cash flow.
Cash flow is defined by the total ownership package of the business. Professionals may refer to this term as Owner's Cash Flow or Sellers Discretionary Earnings (SDE) these terms are often used interchangeably when discussing the sale of a business. Generally speaking, cash flow is comprised of net profit, ideally as claimed in the seller's tax returns, plus adjusted expenses (salaries, depreciation, etc). A seller identifying their cash flow correctly is key to attracting potential buyers.
Another reason cash flow is so important is that it helps buyer identify what the return on investment will be for their purchase. The average sale price for a small business (those with cash flow less than $500,000) is between 1x and 3x the cash flow amount. This range can vary depending on factors such as the number of employees, the length of incorporation, industry and the current marketplace. If a seller positions the asking price above this average, there will be little activity on the listing. On the contrary, if a seller positions the asking price on the lower end of the average, he or she can generate lots of activity from interested buyers. All in all, it is essential that the asking price is in correct proportion to the cash flow.
In our next issue, we will explore the next important way a seller can become more attractive to a buyer: Organizational Structure.
Selling a business is a complicated manner. If you have additional questions, please contact one of our Colorado business brokers at 720.259.5099 or email us.