Pacific
Northwest

Business Brokers

Commercial Services Division

Business Sales

(800) 618-2113

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One of the most frustrating aspects of analyzing a business for purchase or sale is the frequent disparity between the stated income on tax returns vs. what is sometimes called the "Seller's Discretionary Cash Flow."

Our U.S. system of taxation encourages liberal and aggressive interpretation of business expenses in order to minimize tax liability. Business owners and their tax professionals work hard year after year to minimize taxable income. Then, when it comes time to sell, it becomes necessary to show how much money the business makes.

Certain stated expenses, submitted on a tax return in accordance with the tax code, may nevertheless be properly interpreted as "non-essential" to the operation of the business. For example, the IRS may allow the business owner to write off interest and depreciation for a $90,000 Mercedes, when the business can be adequately served by a $25,000 Chevrolet. The difference between these two choices may be considered discretionary cash flow available to the business owner.

There are many such areas for debate, and they need not imply any impropriety on the part of a seller. Getting through to an accurate picture of the business's ability to produce cash flow benefits for its owner or owners is essential to determining value and debt service capacity. The seller is advised to conduct this review prior to listing, in order to get a more accurate picture of what the buyer and the lender will be looking at: demonstrated cash flows.

And the buyer should be prepared to look past a tax return, in which the seller has interpreted the tax code aggressively, to see what discretionary cash flows may be present. We are not accountants or tax specialists. But we have seen many examples of expenses that could reasonably be classified as seller's discretionary cash flow, and can bring an experienced perspective to both buyer and seller.

If you would like to have a no-charge phone session to explore how we can assist in analyzing the financial performance of a business, please call us at (800) 618-2113. Our broker in charge of business sales, Gary Richards, will be happy to talk with you.

Licensed real estate broker in the State of Oregon