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Need some help on accounting terms...

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ogmike

Veteran

Joined: Jul, 2002

Posts: 2947

Posted: Jul. 21, 2011 - 6:06 PM ET #1

What is discretionary income when talking about a small business? Is that the same thing as cash flow? Or is it more similar to net income? I was looking at a business on BizBuySell for shits and giggles, and the broker tells me that the business had 47K of discretionary income last year on 563K in sales. My question is, is that 47K what the owner takes home? I'm pretty new to small business lingo, and I hate accounting, so need some help here.

Also, what % do you guys think these business brokers make on a sale? Thanks for any input!

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wallstreetcappers

Covers Linesmen

Joined: Feb, 2003

Posts: 56778

Posted: Jul. 21, 2011 - 7:31 PM ET #2

I think a biz broker makes 5% on a sale (if I remember correctly).

Disc income is what you have left after all other expenses, its a term used in the case where you are a biz owner and that money is what you would consider "pay" although you havent paid taxes on it.

Those sales numbers relative to discretionary income arent very good. What kind of a job is it? (you are buying a job there as you know).

Also, I could guess that they are asking over 100k for this..usually I find on bizbuysell it is 2 times cash flow/disc income.

So in that case once you net out all taxes, you would make around 30k a year using their likely inflated numbers.

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ogmike

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Joined: Jul, 2002

Posts: 2947

Posted: Jul. 22, 2011 - 11:13 AM ET #3

Thanks wsc! Yeah I'm not actually planning to buy it... it being a liquor store. I actually have ideas of opening up a liquor store in an up and coming area, and I just started looking at all the liquor stores in the city on Google Maps to see how far away my competition would be. Then I went to a couple different brokers to see what's for sale out there, and inquired about a specific one to see what kind of details he would give me on the business (revenue, rent, CF, etc.) Without giving me the name, he gave me enough info for me to figure out which exact location it was. I have a different area code on my cell, so he thought I was from out of town. The store for sale is actually less than a mile from where my parents live, but has 3 competitors within a 2 mile radius... which is pretty unreal for a residential area.

As for asking price, they were asking 200K! I know, right? That's why I was curious of what the broker takes from the deal. Since I knew which location it was, I thought to myself: Why can't I just go straight to the liquor store owner and undercut the shit out of the asking price, and tell him I will pay cash. Seems with small business, paying for cash makes a big difference. I was thinking that the broker would take much more, so I guess I wouldn't have been able to even undercut by that much, if the broker only makes around 5%. Thanks again!

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esplanade

Captain

Joined: Feb, 2008

Posts: 9021

Posted: Jul. 28, 2011 - 4:21 PM ET #4

Cash flow and SDE are synonymous. Be careful as brokers make every effort to fully add back depreciation to SDE and that is often inappropriate. A standard, non-negotiated broker take is 10% !!

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depeche2

Legend

Joined: Feb, 2002

Posts: 67006

Posted: Jul. 28, 2011 - 5:58 PM ET #5

Quote Originally Posted by ogmike:

Thanks wsc! Yeah I'm not actually planning to buy it... it being a liquor store. I actually have ideas of opening up a liquor store in an up and coming area, and I just started looking at all the liquor stores in the city on Google Maps to see how far away my competition would be. Then I went to a couple different brokers to see what's for sale out there, and inquired about a specific one to see what kind of details he would give me on the business (revenue, rent, CF, etc.) Without giving me the name, he gave me enough info for me to figure out which exact location it was. I have a different area code on my cell, so he thought I was from out of town. The store for sale is actually less than a mile from where my parents live, but has 3 competitors within a 2 mile radius... which is pretty unreal for a residential area.

As for asking price, they were asking 200K! I know, right? That's why I was curious of what the broker takes from the deal. Since I knew which location it was, I thought to myself: Why can't I just go straight to the liquor store owner and undercut the shit out of the asking price, and tell him I will pay cash. Seems with small business, paying for cash makes a big difference. I was thinking that the broker would take much more, so I guess I wouldn't have been able to even undercut by that much, if the broker only makes around 5%. Thanks again!

Not sure how it works, but I wonder if the owner would have a contract with the broker where he'd get a cut regardless. Kinda like a real estate broker's contract. Not sure your approach would help.

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Need some help on accounting terms...

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