Cash flow mostly determines a newspaper’s selling price

By Lewis Floyd, Sr. Associate, W.B. Grimes & Co, (850-532-9466) lfloydmedia@gmail.com

Calculating Your Purchase Price

From the sellers view, the value of their publication(s) is usually not as high as they would like; the industry use to use a multiple times revenue, now it is mostly a multiple of cash flow which is often less than one times revenue.   Regardless of how a buyer and seller come to terms, even if the value seems to be there, there is one more factor a buyer should consider – can this business repay my investment in a timely manner or make loan payments – and still provide me with an income?

From the buyers view this is the most important question they should ask before committing to the purchase. Depending on the type loan, the security of a loan, or a buyers return on investment needs, the most typical time periods are 5, 8, and 10 years (note: if real estate is involved the terms may be longer, or at least the repayment terms for the real estate normally are longer, 15 to 20 years)

The calculation I use as a business broker to validate a sales price can be used to comfort a buyer with the probable payback and income they should expect.

Let’s take an example:                    The current revenue is         $950,000

                                                                 The current cash flow is       $200,000

First is determine a price – assume the multiple is 4.5 times cash flow which is $900,000.

Using the $900,000 as a return on investment, you can consider the following:

           

Purchase Price 900000 900000 900000
Investment recovery years 5 8 10
Annual recovery amount 180000 112500 90000
2016 Cash Flow 220,000 220,000 220,000
Balance funds for Buyer 40,000 107,500 130,000

Using the price determined by the seller, the buyer does not have a lot left, so perhaps the buyer will make a counter offer of $700,000:

Purchase Price 700000 700000 700000
Investment recovery years 5 8 10
Annual recovery amount 140000 87500 70000
2016 Cash Flow 220,000 220,000 220,000
Balance funds for Buyer 80,000 132,500 150,000

 

The buyer may have other factors that allow them to make the higher offer, e.g. – they may be able to do a longer recovery time, or could see growth the seller has not accomplished, or synergies the seller has not acted on, which could allow for a higher price close to the sellers asking price.

If the investment recover amount is a loan for the purchase the buyer really needs to consider the funds left after paying the loan note – if they cannot live on the funds left they should not purchase it at that price.       Just saying …

 

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