Understanding Business Profitability - Buying or Selling a Business
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Understanding Business Profitability - Buying or Selling a Business

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This presentation helps business buyers better understand how to value a business and determine how much it's worth. Income Statements and Balance Sheets frequently create confusion among buyers and ...

This presentation helps business buyers better understand how to value a business and determine how much it's worth. Income Statements and Balance Sheets frequently create confusion among buyers and this presentation offers insight to business owners who are planning to sell their business and to business buyer in the process of evaluating businesses to buy.

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Understanding Business Profitability - Buying or Selling a Business Understanding Business Profitability - Buying or Selling a Business Presentation Transcript

  • MED BizBuySell
    Understanding Business Profitability
    Buying or Selling a Business
  • Business Financials
  • Adjusted Documents
    Balance Sheet
    Income Statement
    Seller’s Discretionary Earnings (SDE)
    Adjust to Balance Sheet to Fair Market Value of Assets being transferred
    SDE = $ generated for debt service & owner wages
    Includes Furniture, Fixtures, Equipment (FFE) & Accounts Receivables
    Adjusted Income Statements allow Buyer to compare different businesses equally
    Banks will lend on assets AND cash flow
    View slide
  • Business Earnings Defined
    View slide
  • Recasting Income Statements
    Recasting Example:
    2008 Unadjusted Pre-Tax Profit = $58,547
    vs.
    2008 SDE = $256,613
    An uneducated Buyer & Seller could view profitability as:
    $58,547 vs. $256,613
    More than 400%!
  • Items Typically Adjusted
    • Depreciation
    • Amortization
    • Interest
    • Officer Compensation
    • Family Salaries & Benefits
    • Officer Insurance
    • Officer Auto
    • Officer Fringe Benefits
    • Rent
    • Replacement Employees
    Sometimes Positive / Sometimes Negative
    Each Buyer Must Adjust Accordingly
  • Taxable vs. Total Cash Benefit
  • Taxable vs. Total Cash Benefit
    The present owner spent his “earnings” as shown in the previous slides. The business buyer, the above Discretionary Cash Flows are amounts to spend at your discretion.
    This could include paying yourself a salary, servicing the debt required to buy the business and other owner benefits.
  • What are the Necessary Expenses
    … in order to generate the same level of Sales
  • Understanding ADD-BACKS is Critical
    BUYERS: Determine the revenue-dependent vs. discretionary expenses
    SELLERS: Highlight the flexibility associated with control of your DCF
  • CONTACT INFORMATION
    MED BizBuySell
    762.233.7020
    Info@MEDBizBuySell.com
    www.MEDBizBuySell.com