You have heard variations of this expression before: no matter how profitable you are, if you don’t have cash you can’t pay your bills.

We are going to look at cash flow from the perspective of Business Transition.

The strongest single driver of what people will pay for a business is a multiple of EBITDA: Earnings Before Interest, Taxes, Depreciation and Amortization.

It’s worth noting that EBITDA is a proxy for the cash flow a business generates. Yes, it has its roots in profitability, hence a strong inter-relationship between the two, but think of EBIDTA as an indication of “cash” profitability.

However, when it comes to the value of your business, the stronger the EBITDA, the more prospective buyers will be willing to pay for the business.

At Business Transition Alliance (BTA), we believe in the philosophy to run your business as if it is for sale, and always encourage our clients to do so. Whether you are planning on selling in the near or distant future, or if your transition might be to hand the business over to family members and just step back, why is this philosophy so important?

On May 8 2018, Chris Griffiths published an article in the Globe and Mail titled Why You Should Run Your Business as If It’s Always for Sale, where he stated this idea well.

“There are two good reasons…first bring discipline to your operations and financial priorities. Second you may find yourself suddenly needing to sell…”

Both reasons lead us back to EBITDA.

A strong EBITDA is in part a result of reason one: discipline. Know your KPI’s (Key Performance Indicators) and metrics. A key metric is your cash flow. Is it strong and growing or declining and stressed?

An EBITDA that can stand on its own two legs also allows you to enjoy running your business and have ease of mind at the time of transition. Relishing your business should be a primary objective of any business owner, as life is too short not to enjoy the journey.

Keep in mind, it takes time to build a track record of EBITDA. Buyers will look at its trajectory as a predictor of future opportunity or risk.

At the end of the day, consider a possible buyer’s perspective: who would pay top price for a business with a declining EBITDA? Those types of businesses are bargains.