Business Acquisition | Tips On Proving Cash Flow
The parties associated with the business acquisition process are interested in a business’s cash flow for obvious reasons. Why acquire a business that is not growing and thriving, or at least has the potential to do so? Despite the necessity of needing to establish your business’s numbers for a potential acquisition, it’s essential to prove your business cash flow in any situation accurately. Learn more about how you can correctly and efficiently verify your business’s cash flow numbers in 2022.
Discretionary expenses are nonessential business expenses. Discretionary expenses are often defined as nonessential spending; in other words, these expenses are not completely necessary for the business to continue operating. Discretionary spending includes expenses like advertising, travel, dues & subscriptions, employee appreciation, and entertainment. These aid in the operation of your business but aren’t necessary to keep the doors open.
Business expenses for individuals that include meals, hotels, company vehicles, and other perks that relate to the business are also cash that can be rerouted to other, more essential, channels.
Essential Business Expenses
Essential business expenses include all expenses that are necessary to keep the business running. This could be insurance, salaries, rent, utilities, inventory, etc. Some business loan officers may be moving too fast during the review process to focus on every expense in the book, but any well-versed business person will want a description of essential business expenses in a potential acquisition.
Other expenses – like if the company covers the insurance costs of the business owner – may be considered personal expenses that also need to be accounted for when calculating business cash flow. A new business owner, if titles transfer, may decide to use these funds for essential business expenses instead, or to pay off debt or invest in additional assets. Including in cash flow how much is set aside for individual business expenses is important.
Selling Your Business? One-Time Costs
One of the most common reasons to prove business cash flow is when a business owner decides they want to sell their business. One-time costs like lawsuit settlements, equipment purchases, and leasehold agreements will only affect the cash flow of a business under the seller’s ownership. These costs will not affect the cash flow once the business is under new ownership, so these would be considered add-backs.
If a new business buyer is attempting to buy your small business, there is a chance they won’t know how to restate these costs. This is when it is important to enlist the services of an experienced business acquisition finance advisor. This advisor can help the buyer add these expenses back to earnings so they can show the lender a more accurate picture of the company’s cash flow. Any lender will want to know every avenue of cash flow so they can be sure that loans will be paid back after the acquisition by a new owner.
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