{"id":1671,"date":"2019-06-27T07:34:02","date_gmt":"2019-06-27T12:34:02","guid":{"rendered":"https:\/\/www.sunbeltnetwork.com\/cincinnati-oh\/?p=1671"},"modified":"2025-02-20T15:49:59","modified_gmt":"2025-02-20T15:49:59","slug":"determining-business-value-cash-king","status":"publish","type":"post","link":"https:\/\/www.sunbeltnetwork.com\/cincinnati-oh\/determining-business-value-cash-king\/","title":{"rendered":"Determining Business Value: Cash Is King, But\u2026\u2026.."},"content":{"rendered":"<p>Many people believe that a multiple of earnings, or cash flow, is a static formula that applies to all businesses equally.\u00a0 This couldn\u2019t be further from the truth.\u00a0 In fact, net income is only one of many factors that influence the value of a business. \u00a0\u00a0This article attempts to provide a broader, more accurate view of what influences the value of a business.<\/p>\n<p>First, what\u2019s the starting point?\u00a0 Step one is to determine the adjusted earnings, or cash flow, of a business.\u00a0 Note: <em>the use of the term cash flow should not be confused with a company\u2019s daily cash flow or statement of cash flow<\/em>.\u00a0 The number you see as Cash Flow on our site, and other businesses for sale search engines, refers to adjusted cash flow or adjusted EBITDA.\u00a0 According to the IBBA (International Business Brokers Association) the standard formula for determining cash flow is:<\/p>\n<p><strong>EBITDA + one owner salary + one-time expenses + other owner benefits = Cash Flow<\/strong><\/p>\n<p>There are many models used in the <a href=\"https:\/\/www.sunbeltnetwork.com\/cincinnati-oh\/valuations\/\" target=\"_blank\" rel=\"noopener\">business valuation process<\/a>, some of which are very complex and not applicable to businesses with less than $5M in revenue.\u00a0 This article isn\u2019t intended to be a tutorial on preparing a business valuation.\u00a0 The intention is to focus on Non-Financial Value Drivers, areas that influence a business value, either in a positive or negative direction.\u00a0 Below are some of the criteria we consider, and rate on a scale of 1-4:<\/p>\n<ul>\n<li>Earnings Track Record \u2013 have profits for the last 3+ years been consistent or somewhat lumpy<\/li>\n<li>Industry Growth \u2013 is the industry growing or declining<\/li>\n<li>Location \u2013 how much does the business\u2019 location impact sales\/customers<\/li>\n<li>Customer Concentrations \u2013 is there a broad customer base or do very few customers make up a high %<\/li>\n<li>Product\/Service Concentration \u2013 are the firm\u2019s revenues made up of many products\/services or a few<\/li>\n<li>Market Concentration \u2013 does the business serve a large or limited geographical market<\/li>\n<li>Competition \u2013 are there many competitors in the market or few; large or small<\/li>\n<li>Employees \u2013 unskilled or highly skilled; long-term or short tenure; easy to replace or difficult<\/li>\n<li>Ease of Operation \u2013 is the business turnkey or are many processes in the owner\u2019s head<\/li>\n<li>Management \u2013 owner operated with little or no management or is a strong management team in place<\/li>\n<li>Deal Financing \u2013 will lenders look favorably on the business for financing; will the business provide enough post-debt service cash to be attractive to prospective buyers<\/li>\n<\/ul>\n<p>The bottom line in this analysis has to do with <strong>Transferability<\/strong>.\u00a0 A business that is positioned to, with reasonable ease to a qualified buyer, transfer clients and a stable workforce with policies and procedures in place, will a greater value and will be more attractive to the market.<\/p>\n<p>If you would like to discuss your business value or how to reduce the gaps in any of these areas, please contact Sunbelt Business Advisors for a no-cost, no-obligation review session.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Many people believe that a multiple of earnings, or cash flow, is a static formula that applies to all businesses equally.\u00a0 This couldn\u2019t be further from the truth.\u00a0 In fact, net income is only one of many factors that influence the value of a business. \u00a0\u00a0This article attempts to provide a broader, more accurate view [&hellip;]<\/p>\n","protected":false},"author":51,"featured_media":11700,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"om_disable_all_campaigns":false,"footnotes":""},"categories":[21,17,2],"tags":[],"class_list":["post-1671","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-exit-strategy-planning","category-general","category-selling-a-business"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v27.6 - 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