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Old 02-21-2013, 09:34 PM
kgrove kgrove is offline
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Join Date: Jun 2008
Boat: 2011 X-25
Location: Phoenix
Posts: 797
The best measure of a business is cash flow since in the end thats what youll care about - is my savings account getting bigger. Many small businesses aren't capital intensive and don't have much depreciation and amortization, so net income usually tracks closely to cash flow.

Don't forget to look at asset depletion, however. For instance, you could look at a small business that has been generating good cash flow for 2-3 years in a row and get excited, but this may not mean they are worth much if they have been doing that by not reinvesting in their business so equipment, tooling, computers, etc. are running down and will need to be replaced. Their cash flow may appear high because they have a bow wave of building investment needs.

As for valuation, theoretically if you had a good cash flow model you could value it without knowing much about the industry. As for "multiples" or similar rules of thumb, they exist but you have to know how to apply them. For instance a business generating 100K annual cash flow is worth much more if it has good growth prospects than if it has poor growth prospects. It's also worth much more if the cash flow is fairly predictable and safe rather than highly cyclical (e.g., in the last downturn, did grocery stores or boat dealers get hit worse?).

There's a lot too it. If the answer is important to you, having an accountant or business appraiser come in and look would be well worth the money.
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