By Arron Wu
Arron spent 10 years at the largest private equity firm in Europe, buying and selling over €10 billions worth of companies.
I spoke to many business owners who are thinking about a sale of their businesses. When we discussed how cash flow impact what their businesses could be worth, most saw it as a "soft" factor.
From my experience of buying & selling companies, that's a grand understatement.
You have spent years, pulled off multiple miracles, to get your business to where it is. But when it comes to selling, it's heartbreaking to find your business worth less than you expect.
The price buyers are willing to pay—and what you ultimately get to keep—hinges on one critical factor: cash flow.
Many business owners don’t realise this, but inconsistent cash flow can reduce what your business is worth to you by 30% or more. If you’re even thinking about selling your business in the next 5 years, understanding this could save you millions.
When buyers value your business, they focus on two key numbers:
Cash flow directly impacts both of these numbers significantly. Let’s dig into how.
Buyers care about returns on their cash. But what they think your business could be worth depends on whether they can use debt to fund the purchase.
If you want to read more about Enterprise Value, you can find it here.
Imagine you are buying a house with a mortgage, and a 10% deposit. If the house price increases by 10%, the value of your mortgage doesn't change with it, and you have actually doubled the value of your deposit!
Think about it from the other direction, mortgage enables buyers to pay more - can you imagine what house prices would look like if mortgage ceases to exist?
The same applies to valuing your business. If your cash flow is predictable, buyers can borrow to fund the deal. That means they:
In the simple example below, the buyer can afford to value your business 30% more, while still doubling their own cash invested.
If you want to know more about how buyers use debt to buy companies (known as Leveraged Buyout), you can find it here.
Debt increases what buyers can value your business at, but it comes with risk. If your business can’t generate consistent cash flow to repay the debt, the buyer could lose their investment.
This is why buyers will only borrow if your cash flow is rock solid. If it isn’t, they’ll stick to their own cash—and pay far less.
To give buyers confidence to use debt, your business needs to show:
Without this, buyers will play it safe, and your business valuation will suffer.
Many business owners are caught off guard by this at the final stages of negotiation.
After an already tense negotiation to agree an Enterprise Value, buyers make adjustments for cash and working capital to determine the Equity Value - the amount you actually receive.
When you buy a house, you'd expect fixtures like doors and windows to come with it, but not the furniture (not without extra cost). But if there are unusual fixtures, like a solid gold bath tub, you'd expect to pay for it (or the seller can take it away).
The same applies to valuing your business. Buyers assume a “standard” level of cash and working capital to keep the business running. Anything outside of that gets adjusted.
Here’s how buyers think about it:
Cash
"Your business needs a minimum amount of cash to run smoothly. That’s not extra cash—it stays in the business."
The more volatile your monthly cash flow is, the higher "minimum cash" the buyer will insist, and the less credit you get for the cash in your business.
Receivables (What Your Customers Owe You)
"Every business carries receivables as part of its normal cycle. I won’t pay extra for them because I assume they’ll always be there."
This is not just the standard payment term, but the historic pattern of how quickly your business actually collected cash. The buyer will focus is on the average receivables over a 2 year period, so even if you pull in some favours and get a few earlier payments at the last minute, it is unlikely to help.
Payables (What You Owe Your Suppliers)
"If the business can consistently sustain a level of payables, I’ll credit you for that."
Again this is not just the standard payment term from your suppliers, but what your business has been getting away with sustainably. If your business always operated with a good and consistent level of payables over a 2 year period, this won't get deducted from the Equity Value.
If you want to read more about this, here is a reader-friendly article, or here is a technical version for an in-depth overview.
It is common for savvy business owners to build up a sizeable cash balance to take advantage of capital-gain tax vs. income tax. This is a smart idea. But how much could the cash and receivables in your company be worth to you?
Buyers will only pay for the excess cash (above minimum cash required) in your business, or any deviations from a normal level of receivables & payables.
Many business owners would argue "you can easily collect harder and push out payment terms" - but the buyer is rarely willing to assume that, as it's impossible for them to know what could work or break in your business.
That negotiation typically ends up as the below, the difference to what you thought your business is worth to you could be millions.
Buyers will analyse the last 2 years of your business to determine:
Here is a useful article on how buyers analyse working capital during their due diligence, written by accountants who do the work for them.
If you’re thinking about selling in the next 5 years, you need to get your cash flow under control now. Buyers will scrutinise at least 2 years of history, so it’s critical to act well in advance to make sure your business is worth what it deserves.
Or if you want to go in depth into cash flow optimisation, here's a comprehensive guide from PwC.
Let’s face it: managing cash flow isn’t why you started your business. It’s operational, tedious, and time-consuming.
That’s why we built Clide—to seamlessly handle cash flow, invoices, payments, and working capital. We keep your business match fit for when the right buyer comes knocking—so you can focus on what you do best. Click here to get a demo!
Thinking about an exit? Start managing cash flow today. Future-you will thank you.
