What does cash flow mean when buying a business?

When a seller or listing mentions cash flow, ask what exactly is being counted. BDC defines cash flow as the movement of money in and out of a business, showing how much cash is generated and used over a specific period. Ask how any figure was calculated before you compare one business with another.

Cash flow is not profit

More cash coming in than going out means cash flow is positive. BDC notes that even profitable businesses can experience short periods of negative cash flow. So a business can look profitable on paper and still be short of cash at a given time, which is why a buyer asks for both the income statement and the cash records.

Where EBITDA fits

EBITDA is earnings before interest, taxes, depreciation and amortization. BDC calls it a good shortcut to give a quick picture of available cash flow, but also says EBITDA is not equivalent to profit and does not account for non-operating expenses such as interest on debt and taxes. Treat it as a shortcut to a picture of cash flow, not as cash flow itself. See the glossary entry on EBITDA.

Why lenders and valuators care

BDC says banks look at cash flow to help decide how much they are willing to lend, and that in earnings-based methods a valuator reviews forecasted earnings or cash flow and past results. BDC’s business purchase financing page lists repayment based on your cash flow as a feature. Ask any lender how it will measure the cash flow it relies on.

What to do with it

BDC suggests reviewing your business plan and cash flow projections with your accountant to determine what you can afford. Ask the seller for the records behind any cash flow figure, and ask your accountant whether the number includes the seller’s own pay and one-time items. For the money you need up front, see how much cash you need to buy a business.