Understanding discretionary cash flow is an important part of making the best decision when buying or selling your automotive center. Discretionary cash flow is the amount of money that is left over after all of a company’s expenses have been paid out. The amount that remains can be used to pay out bonuses, pay off debt, pay shareholders, or invest in the business.
Determining the Valuation of Your Business
As an automotive business owner, your discretionary cash flow helps you determine the valuation of your business and its potential long-term profits. However, understanding how to calculate discretionary cash flow can be a daunting task, especially for new business owners.
At AutoCenter Sales, our automotive business experts can help you understand the role of discretionary cash flow in your automotive shop and make the best decisions when buying or selling your business.
Understanding Seller’s Discretionary Cash Flow
As a buyer or a seller of an automotive center, you will need to look at SDCF, or Seller’s Discretionary Cash Flow. SDCF is a company’s pre-tax business earnings before non-cash expenses, interest expense or income, one-time expense items, owner’s compensation, and non-business-related expense or income items.
Some examples of expenses that may be disputed include:
● Automobiles used by owners
● Travel expenses
● Owner’s benefits
Calculating SDCF
While there may be disagreement between sellers and buyers on specific items, the following metrics determine the SDCF.
1. Begin with the value of pretax earnings
2. Add non-operating expenses less non-operating income
3. Add one-time or unusual income less non-recurring income
4. Add depreciation and amortization expenses
5. Add interest expense less interest income
6. Add owner compensation
No Standardized Formula
The method for valuing SDCF remains fairly straightforward. However, disputes over which items constitute one-time or unusual expenses may arise between buyers and sellers. No formally adopted set of rules currently exists to standardize these expenses, which means the inclusion of certain items to ascertain the final valuation must be negotiated among the parties.
Calculating SDCF continues to be a bit of both an art and a science. The key to a successful transaction is sound negotiating between buyer and seller working toward a mutual goal.
Experts in Automotive Business Process
The challenges of buying and selling any business exist no matter the size and scale of the operation, and having a trusted broker reduces the inherent risks involved. We specialize in the brokerage of businesses in the automotive field and can put our expertise to work for you in acquiring or selling an automotive center.
Whether you are selling an automotive shop or buying a Jiffy Lube, give us a call to discover how we can make your next purchase or sale a smooth and beneficial transaction. Contact us at 1-800-874-5793, or you can message us at info@autocenter-sales.com.