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 we often use is free cash flow - 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 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 buyout.
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 it cannot support all your exit objectives. You will then explore alternatives to your original plan and answer important questions:
Vantaca’s Balancing Act
Audrey Elsberry
-
May 17, 2024
|
|
Channel, UNC Law School Aid Wilmington Small Businesses
Audrey Elsberry
-
May 16, 2024
|
|
Developers Mark Opening Of $78M Apartment Project At Riverlights
Staff Reports
-
May 17, 2024
|
|
Two Apartment Projects Pitched For Kerr Avenue
Emma Dill
-
May 17, 2024
|
|
As Hurricane Season Heats Up, How Do Builders, Laws Prep Homes For Storms?
Emma Dill
-
May 17, 2024
|
“We want to swing big, and we have a vision of building a really massive company that is the industry standard for software in our space."...
Ocean City Beach was established in 1949 and became the first community in the state where Black people could purchase oceanfront property....
The 2024 WilmingtonBiz: Book on Business is an annual publication showcasing the Wilmington region as a center of business.