Financial Analysis: Cash Analysis

----- quick financial analysis summary -----

calculate the cash flow position

The cash flow position must support the asking price. Think about it.

If you were going to invest $100K as a down payment to buy a company, the return of your investment needs to equal a cash return that is greater than the return if you invested the down payment in the equity markets.

Additionally, if you were going to expense your "sweat equity" to manage and grow the business, the cash return must be greater in value than finding a job that would give you equal value.

That is why cash is a determinant factor when making a business purchase.

Measuring Cash:
	Take the: company's discretionary cash flow use a 3-year or 5-year weighted average: see calculations
	Reduce this by: Annual debt service this will include the principal and interest payments for financing the purchase price of the business less the down payment Owner or manager annual salary the market rate for managing the business either as the owner or through a hired manager Capital Expenditures the amount that must be paid to maintain, service, and replace business equipment and other fixed assets. A good benchmark is to replace all operating assets within five years. Take the market value of the operating assets and divide by 5 Return on Down Payment the investment return on the down payment
	Equals: Remaining Cash Flow this amount needs to be positive to justify the asking price

Example:

Estimated Sale Price:	$450,000
Buyer Down Payment @ 33%:	$150,000
Business Financing @ 67%:	$300,000 10.0% 7-Yr Note
Market Value of Operating Assets:	$50,000
Estimated Return on Down Payment:	5.0%

Annual Sustainable Cash Flow:	$185,000
Less: Debt Service	$59,764
Less: Debt Service Cushion @20%	$11,953
Less: Annual Capital Expenditures	$5,000
Less: Return on Down Payment	$7,500
Less: Owner's Salary	$100,000
Cash Flow Coverage:	$783
The example shows that my "down-payment" and "sweat equity" will generate a positive cash position after paying financing costs and deducting a cash salary. The asking price is justified in this example given the positive cash flow position after deducting financing cost, management salary, return on the initial investment, and capital expenditures. *Note: Standard cushion required by lenders when underwriting this loan. This amount covers the cost of financing in the event of economic or market turndown. The amount is not an expense and would be an additional amount to cash flow.