Cash flow / Selling price.

[Gabs]

Hi everyone !

I started on my research to buy an existing business. I am thinking about nothing in particular, yet just out of curiosity, can a business have a cash flow way superior to its selling price or should I really be on guard when finding such a listing? (I'm talking about 4 or 5+ times superior). Is it common enough not to be suspect? Thank you !

[Patrysha]

Not sure what you mean by superior cash flow to selling price, but yes you should be looking over the numbers carefully - As for whether the cash flow is an accurate reflection, it really depends on the business in particular and how it compares to the industry - if they're off from industry standard that might be a flag.

[Freelancier]

Test the numbers! For example, confirm all asset values (like check their bank accounts, credits at suppliers, etc.). Verify that customers actually paid what the books say they did. Assume nothing is accurate until you confirm it.

[Gabs]

Thanks !
I should have been more specific, sorry about that. For instance, the following actually exists and is currently for sale: a wine and liquor superstore, asking $250k with a cash-flow of about $800k. I am not considering buying it, I am just trying to understand. It seems too good to be true.
Freelancier: Thanks ! Obviously, I would test the numbers. I am just trying to get a broad picture before getting into the details.

[Fulcrum]

Pretax $800K net or $800K in sales?
If net, is the owner's salary included in the $800K or is it included under wages?

Freelancier is absolutely correct. Test everything and confirm all known sources of income and expenses. The only other piece of advice I can give is to only make an offer based on values that can be proven (do not let a seller upsell you based on "off the books" income).

[Gabs]

Pretax $800k net, owner's salary included in the $800k.
Thank you for the advice :-)

[Business Attorney]

Businesses typically sell for a multiple of net cash flow. That can vary widely among types of businesses as well as specific businesses. A common range is 4-6 times net cash flow. A business with a lot of growth potential may sell for a multiple above that range and one that has seen declining revenues and profits will typically sell at or below the bottom end of the range. Those multiples translate into a return on the purchase price in the 17% to 25% range.

For a business to sell at a FRACTION of the cash flow would be highly unusual. In fact, in nearly 40 years of representing buyers and sellers, I can't think of a single time that has happened. In the sale of a professional practice such as a medical practice or a consulting firm, the range often nears 1:1 because the dynamics are entirely different, but I can't imagine a scenario where a retail business would sell for what amounts to about 4 months income.

Something does not seem right.

[turboguy]

If that was real and actual most everyone on this forum would eagerly line up to buy it. Something is rotten in Denmark or wherever that business is.

[Gabs]

Right Business Attorney and turboguy, that's exactly what I thought. Ty !

[tallen]

Maybe there is a zero missing in the sale price? Stupid typos!....