Cash Flow and Business Valuation

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When business owners and their financial advisors review a firm for acquisition purposes one of their main goals is the assessment of 'cash flow '. Business generates cash flows from three sources:

Their operations/profits

Investments into the business

Borrowing activities


When cash flows are being assessed the business owner, or their advisor is really going through 5 key areas of the business cash. Those areas are as follows:

1. Reviewing the income statement

2. Analyzing what cash needs to be spent on new equipment, plant, etc

3. Checking the overall working capital situation

4. Determining the total annual cash flows

5. Putting a value on those future cash flows

Where does the acquirer begin in this entire process? A careful review is made of the income statement with respect to gross profit margins and fine net income. After determining that final net income number the analyst ' adds back ' the amount of deprecation the company took, as it was not a real cash outlay.

This leaves us with somewhat of the 'magic number '- aka 'EBIT '. (Earnings before interest and taxes)

Careful analysis is made of the income statement - all the basics are reviewed: sales goals, material costs, profits, and the administrative expenses. Since the business owner is making an investment in the future when he buys a firm generally the above analysis is done for 3-5 years out.

We then carefully look at all equipment (point 2 above) and determine useful life and replacement needs.

Item 3 brings us to working capital analysis. As sales grow we need to carry more inventory and receivables, balance by what our suppliers will give us for credit, as well as what we can negotiate with the bank for operating facilities

The business owner, the acquirer also will review what is known as the 'terminal value' of the cash flow. This is a more complicated analysis involving projected cash flows divided by the cost of capital - growth.

We are in the home stretch - the final part of our analysis takes those future free cash flows and does a present value calculation to see what they are worth today.

In summary, whether Wall Street analysts are contemplating a multi billion dollar merger, or if a business owner is looking to buy Bob's Seed Supply the above valuation techniques are those that are always used by business acquirers and their advisors. The company, and its cash, is looked at from every angle in order to determine possible issues and changes required. A solid cash flow valuation will make or break the quality of the acquisition. The owner is 'counting' on that!




7 Park Avenue Financial :

South Sheridan Executive Centre
2910 South Sheridan Way
Suite 301
Oakville, Ontario
L6J 7J8

Direct Line = 416 319 5769

Office = 905 829 2653

Email = sprokop@7parkavenuefinancial.com

http://www.7parkavenuefinancial.com


Business financing for Canadian Firms , specializing in working capital, cash flow, asset based financing , Equipment Leasing , franchise finance and Cdn. Tax Credit Finance . Founded 2004 - Completed in excess of 100 Million $ of financing for Canadian corporations .

' Canadian Business Financing With The Intelligent Use Of Experience '

ABOUT THE AUTHOR
Stan has had a successful career with some of the world’s largest and most successful corporations.
Prior to founding 7 Park Avenue Financial in 2004 his employers over the last 25 years were, ASHLAND OIL, ( 1977-1980) DIGITAL EQUIPMENT CORPORATION, ( 1980-1990) ) CABLE & WIRELESS PLC,( 1991 -1993) ) AND HEWLETT PACKARD ( 1994-2004 ) He is an expert in Canadian Business Financing.

Stan has over 40 years of business and finance executive experience. He has been recognized as a credit/financial executive for three of the largest technology companies in the world; Hewlett-Packard, Digital Equipment and Cable & Wireless. Stan has had in depth, hands on experience in assessing and evaluating thousands of companies that are seeking financing and expansion. He has been instrumental in helping many companies progress through every phase of financing, mergers & acquisitions, sales and marketing and human resources. Stan has worked with startups and public corporations and has many times established the financial wherewithal of organizations before approving millions of dollars of financing facilities and instruments on behalf of his employers.

Stan Prokop

















Article Source: http://EzineArticles.com/expert/Stan_Prokop/432698

Financing A Business Purchase : It Pays To Follow This Business Valuation Advice

The Upside Of Financing A Business Valuation Well


OVERVIEW – Information on financing a business purchase in Canada . Business valuation factors and how you interpret and use them have a key role in buying and selling a company successfully

Financing a business purchase in Canada comes with one major requirement - needing to know certain aspects of business valuation and how some of key factors in that process will affect your ultimate success in buying or selling a business. Let's dig in.

Why would business owners / entrepreneurs take on more risk, in effect gamble on buying a business? Many of course feel that that route actually eliminates risk of financial loss if only for the reason they are buying an existing business. Knowing how to finance that purchase (if you're the buyer) or how to maximize benefits of final valuation are key. We'll look at some key issues here from the viewpoint of both the buyer and vendor.

There are some, let us call them ' soft factors ' in purchasing and financing a company if you're the buyer. Although lenders might not necessarily address these issues with you directly we can assure you they are looking at things like your management and industry experience , external economic conditions within your industry, and the potential finaceablity of your sale at a price you and a seller have agreed on.

Other miscellaneous issues (they might not be that miscellaneous) include some due diligence around premises and licensing issues, any environmental concerns, etc. If real estate is part of your transaction almost no traditional finance solutions can be brought to bear if there are environmental /contamination issues.

Naturally the method the seller and buyer have chosen to ' value ' the business affects the financing you need to consummate the deal. That number can vary differently if you have chosen one business valuation alternative over another. These methodologies are a classic bit of art and science and may include:

Return on investment required by the owner

Cash flow analysis (these must be realistic) Here you need to understand past and future working capital requirements

Book values of assets - In many cases either buyer or sell will want to have these appraised

Any business lender, whether it be a bank or a commercial or alternative lender will want to see some key documents around the purchase and sale. They include:

The actual sale agreement itself

Existing financing that is in place - e.g. bank security, leases, contracts, etc - These are typically verified by lenders by checking govt PPSA filings showing secured lenders and what collateral they claim

Up to date financial statements / tax filings


If you are buying a franchise you will of course need permission from the franchisor

In many business purchases a lot of adjustments happen after the sale. They might include which party collects the outstanding receivables, who keep cash on hand, value of inventory that is on hand at closing, and final payments due on leases, utilities, etc.

Whether you're the buyer or seller knowing how to sell or finance a business purchase is key - seek out and speak to a trusted, credible and experienced Canadian business Financing Advisor with a track record of success who can assist you with your business valuation finance needs.


Stan Prokop - 7 Park Avenue Financial :

http://www.7parkavenuefinancial.com
Business financing for Canadian Firms , specializing in working capital, cash flow, asset based financing , Equipment Leasing , franchise finance and Cdn. Tax Credit Finance . Founded 2004 - Completed in excess of 90 Million $ of financing for Canadian corporations . Info /Contact :



7 PARK AVENUE FINANCIAL = CANADIAN BUSINESS FINANCING & VALUATION FINANCING EXPERTISE










Have A Question /Comment On Our Blog Or Canadian Business Financing Alternatives ?
CONTACT:
7 Park Avenue Financial

South Sheridan Executive Centre
2910 South Sheridan Way
Suite 301
Oakville, Ontario
L6J 7J8

Direct Line = 416 319 5769

Office = 905 829 2653



Email = sprokop@7parkavenuefinancial.com

Inside Mergers And Acquisitions Success In Canada. It Starts With Business Valuation

Can Anything Replace Good Business Valuation When It Comes To Buying A Business In Canada


OVERVIEW – Information on business valuation in Canada. What makes a good deal when it comes to mergers and acquisitions financing ?





Successful mergers and acquisitions deal making in Canada, particularly in the SME sector (small to medium enterprises) often starts with good business valuation. It’s a bit of art and science quite frankly, and if you don't have an army of analysts of investment bankers

doing the work for you these tips and advice should help. Let's dig in.







The proper valuation of a business you are looking at buying or acquiring is often driven by the amount of captial you can either invest or raise financing for. While there are a number of ' rules of thumb' in business valuation nothing makes better sense than... you guessed it... common sense.

In hindsight buying a business or merging with one will seem like a good or
bad deal. Many clients we meet boast they have been able to purchase a business for a great price - with often the reason being poor sales and profitability that they hope of course to turn around.

Knowing the amount of cash you need to both acquire and run the business is critical - and if you're not supplying equity then its all about the right amount, and cost... of debt.

A good business in Canada, when acquired, can often be financed with bank debt. However our bankers and lenders need to clearly understand the nature of the business. Issues you will want to cover off are seasonality of cash flows, client profiles, revenue recognition and billing issues and the level of financial control that you can demonstrate in running the business.

Cash flow analysis is critical, if only for the simply reason that your bank and other lenders want to know how and when the will be paid back. Here's where a clean business plan and cash flow forecast matter most. The latter document should show clearly how debt will be covered, and how profits will be generated via asset turnover, etc.

If your transaction has a proposed high debt to equity ratio a non bank lender will often be required to complete the deal. This type of deal can be successfully consummated via a cash flow mezzanine type loan, or even a non bank asset based line of credit. This latter facility simply monetizes their assets to the maximum allows by your ABL asset based lender.

Very few deals in Canada when it comes to mergers and acquisitions can be accomplished without some level of personal guarantee

from the purchasers. What many business owners don’t realize when it comes to the ' PG ' is that they are often negotiable in size, and can be negotiated to be released based on certain ' pivot points' in the future.

Although generally rare it is possible in Canada to have one bank place less emphasis on the personal guarantors than another bank. One age old technique is to provide a resolution of your directors confirming PG's of owners aren't allowed. That forces a bank to consider the transaction on its own merits. Possible, but not probable as we have hinted.

At the end of the day it comes down really to 4 key issues you face when acquiring a business and financing the transaction:

The amount of internal capital you have and the external capital you need

Types of financing that will accommodate your transaction

Distinguishing between working capital needs and long term debt

Cash flow generation

Proper business valuation focuses on benchmarking the proposed deal within industry parameters, understand key operating ratios, and being able to put solid mgmt in place to close a deal and run a business.

For solid business valuation financing advice seek out and speak to a trusted, credible and experienced Canadian business financing advisor who can assist you with your financing needs when it comes to buying a business.



Stan Prokop - founder of 7 Park Avenue Financial

http://www.7parkavenuefinancial.com

Originating business financing for Canadian companies , specializing in working capital, cash flow, asset based financing . In business 10 years - has completed in excess of 80 Million $$ of financing for Canadian corporations . Core competancies include receivables financing, asset based lending, working capital, equipment finance, franchise finance and tax credit financing.

Info re: Canadian business financing & contact details :

7 Park Avenue Financial = Mergers and Acquisitions Financing Expertise





Have A Question Or Comment On Our Blog Or Canadian Business Financing Alternatives ?


CONTACT:

7 Park Avenue Financial
South Sheridan Executive Centre
2910 South Sheridan Way
Suite 301
Oakville, Ontario
L6J 7J8

Phone = 905 829 2653

Fax = 905 829 2653



Email = sprokop@7parkavenuefinancial.com

Stan Prokop