How are you looking at post purchase cashflows?

March 25, 2023

by a searcher in San Francisco, CA, USA

This is a question for all searchers and those who have acquired businesses through self-funded means - how are you assessing post-purchase cashflows? Do you straight up assume 40% taxes and then look for healthy cashflows after that? Do you look at pre-tax cashflows with the assumption that many of your expenses could be expensed through the business, thus reducing your taxable earnings? I see many businesses with financials where the taxes are nowhere near 40% which leads me to believe that if a straight up 40% tax could make things seem more punitive.

Am I thinking about this the right way? I'm looking at some businesses with around $570K pre-tax cashflow which seems great and around $180K post-tax cashflow which seems mediocre given the risk of SBA loan.

Am I thinking about this the right way or am I missing something here? Which one should I take as a metric for assessing a deal as a self funded buyer, pre-tax or post-tax, especially in terms of a personal risk-reward scenario?

Reply by a searcher
from California State Polytechnic University in San Diego, CA, USA

You're going to want to consult your tax professional on this as there are many moving parts depending on your entity setup, your personal situation, and if you did any tax planning. Look for someone that focuses on businesses (vs just individuals) and will put together a tax plan for you; it's a high ROI in terms of cost. The tax plan will always save you more than it costs; that's why it's an easy sell.

Reply by a searcher
from University of Virginia in Richmond, VA, USA

Taxes are basically a choice of management. This is why you look at EBITDA more than free cash flow. For example, how depreciate PPE affects taxes. Also, a business could have $1MM in EBITDA but pay next to nothing in taxes if it has a captive insurance company.

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