Widely used as the basis to value and price businesses for sale, the seller’s discretionary cash flow (SDCF) is defined by the International Business Brokers Association:
- Start with the business pretax earnings.
- Add non-operating expenses and subtract non-operating income.
- Add unusual or one-time expenses, subtract non-recurring income.
- Add depreciation and amortization expenses.
- Add interest expense, subtract interest income.
- Add a single owner’s total compensation.
- Adjust compensation of all other business owners to market value.
Why SDCF is important to you
For you as the business buyer, SDCF represents all the available cash flow from the business. SDCF is what the business can give you to meet the “must-haves” of any successful business purchase:
- New owner’s compensation.
- Cash flow to meet debt obligations.
- Return on buyer’s down payment (payback).
- Cash available for capital expenses to keep the business running.
Putting this to work for you
To close a successful deal, you need to complete these two critical tasks:
- Determine what the business is truly worth.
- Put together a successful offer to buy the business.
Figuring out what the business is worth
That’s called business valuation. It lets you decide on the business value and the offer price.
Ask any business broker or appraiser and you will hear: there are three ways to value any business:
- Income: based on business earnings and risk.
- Market: by comparing against similar business sales.
- Asset: based on business asset base.
ValuAdder business valuation software gives you all three: a set of proven methods to quickly calculate what the business is worth. You can determine the SDCF for any business and assess it across a number of key financial and operational performance factors.
See what the business is worth. Spot what drives business value. Make a fact-based business purchase decision.
In addition, you can do very quick market comparisons by industry. The market comparisons also save you time – you can rapidly screen out businesses for sale to see which ones are overpriced and spot the bargains.
You can also calculate the value of business goodwill – which helps both during the seller negotiations and purchase price allocation. All in a few keystrokes!
Structuring your business purchase offer
To close a successful deal you need to decide on both the purchase price and terms of your offer. Your goals are:
- To meet all your financial needs after the business purchase. Avoid costly mistakes!
- To win the seller’s acceptance.
ValuAdder gives you an important deal structuring calculation: define your purchase price and terms, and see what business SDCF is needed to make the deal work.
As you change your inputs, ValuAdder instantly recalculates the required cash flow. Everything is considered automatically: business purchase price, working capital, transaction costs, seller and bank financing, your salary, return on your down payment investment and capital expenses you will need.
Now you can ensure that any offer you make will work for you!