Adjustments and add backs to an online business’ cash flow

No matter how you describe the cash flow of a business, SDE, SDCF, or EBITDA; one thing usually remains the same, there’s add backs and explanations to accompany them which are included in those numbers. Here is how we start our conversations with clients: let’s review each add back items individually to determine what we can justify to a buyer and what we cannot. That being said, as we work through our due diligence on any listing, we do understand that while those other add backs which cannot be justified, they are still critically important to cash flow, just ones we wouldn’t be able to convince a buyer to accept.

This is where the broker’s expertise really comes into play; knowing how to address any potential concerns prior to the buyer reviewing the financials because we have seen many deals not get to the closing table due to “red flags”. Each internet broker operates differently, but we simply do not accept a listing if provable and documentable cash flow will not support the asking price. This does not at all mean that there aren’t other variables to be considered when determining a business’ valuation. However, the actual verifiable cash flow is significantly important. Unlike a brick-and-mortar business broker, an online business broker is very knowledgeable about specific internet business models such as ecommerce, SaaS, AdSense, digital marketing, etc., and knows what to look for and where to look in the P&L.

Before any prospectus leaves our office, we have completely reviewed each and every item included in the overall cash flow of the business. We’ve calculated the verifiable add backs for at least the last 3 years and have determine which to present and what questions might arise after presenting them. There simply cannot be any surprises, which means that a buyer can never expose something we missed when we do not miss anything.

Once cash flow has been determined from a buyer’s perspective and we’ve completed our internal due diligence on this business, we will then finalize the viable and feasible asking price with the seller. We are extremely thorough, so once our due-diligence has been completed, we are utterly confident that once and offer has been agreed upon, it will pass the buyer’s due diligence, saving countless hours and days while moving toward a closing.