browser icon
You are using an insecure version of your web browser. Please update your browser!
Using an outdated browser makes your computer unsafe. For a safer, faster, more enjoyable user experience, please update your browser today or try a newer browser.

Reconstructed Cash Flow

Posted by on July 31, 2009

In marketing your business, the idea is to make it as attractive as possible to any prospective buyer, but of course stay within the confines of legality and ethics. You should consider having a pro-forma reconstructed cash flow statement of what the operation might look like under a different owner,but I wouldn’t send these statements out with your offering memorandum, but rather use them as a selling tool during an inspection appointment.

What is reconstructed cash flow? Simply put, its the P/L statement of your company, but with add backs to cash flow that might not apply to a different owner.

Take the net before tax figure, and immediately add back interest payments and depreciation.

Most small companies write off some amounts that go to the current owner’s benefits. These expenses might be salaries of family members, insurance coverage, automobiles, or items owned primarily by the owner but used for example, for company promotional purposes. In this category in the past, I have seen horses, airplanes, a fire truck, a calliope……all manner of things. A vacation home that you use as a corporate retreat or for sales trips.

These can all be considered legitimate cash flow under a different owner, because he won’t have these expenses and they will go to the bottom line. Be sure to ask your CPA what figures apply, and if you are allowing the buyer to take this prepared document with him away from the facility, have a proper disclaimer typed on the bottom referencing what it represents.

The incentive for a buyer to get excited about this, of course, in addition to “newly discovered cash flow”, is that this will, in theory, reduce the multiple on the valuation that the buyer was operating under, and therefore, he begins to think he is getting a better deal.

Leave a Reply