In this article you'll learn:
Getting Started
On your Dashboard page, you will see a banner labelled “Cash Flow Analysis”, click on the "Get Started Now" button.
You will then be presented with the Cash Flow Wizard. Now you can select what type of analysis you would like to perform.
You can either create a cash flow from scratch or enter a purchase price and generate a cash flow based on a series of pre-determined assumptions. Let's start with the latter and generate a Pre-Populated Cash Flow.
Using the Pre-Populated Cash Flow Analysis
First, click on the "Use Pre-Populate" option and click "Continue".
Next, enter a Purchase (or Sale) Price. That will be the only initial input required to generate the analysis. You can also watch the instructions explaining how the Pre-Populated Cash Flow works. Click "Continue" when you're ready to proceed.
You'll then be presented with a Disclaimer reminding you that the contents of the analysis are for illustration purposes only and are not intended to guarantee future economic benefit, contractural obligations or offer of employment. When you've completed reading this, click "Generate"
After the System has completed crunching your numbers, it will present you with 3 options based on the purchase price you provided:
Lump Sum Example - illustrates a scenario where 100% of the practice is paid up front, financed by the buyer.
Fixed Earn-out Example - illustrates a scenario that combines buyer financing, a partial down payment and a fixed price earn-out. Earn-outs are future considerations made to the seller. Fixed price earn-outs are guaranteed compensation at specified future dates.
Contingent Earn-out Example - illustrates a scenario that combines buyer financing, a partial down payment and a contingent earn-out. Unlike the fixed earn-out example, contingent earn-outs are NOT guaranteed and is subject to achieving certain financial milestones. In the case of this illustration it is based on a percentage of revenue.
When you've decided which scenario you would like to explore first, click on its banner to continue. Don't worry, we have saved all three example illustrations so you can review the ones you didn't click at a later time.
Voila! You will now be presented with the illustration you have selected.
Let's explore how to review and update your Cash Flow Analysis.
Reviewing and Editing Your Cash Flow Analysis
Seller and Buyer Summary Sections
Each scenario will allow you to view from the Seller or Buyer(s) point of view. You can toggle between "Seller Summary" and "Buyer Summary" by clicking on their respective sections.
Each Summary section comes complete with high-level metrics typically found in an Analysis of Cash Flows.
Seller Summary metrics include:
Target Retirement - the year in which the Seller exits the business and production revenue ceases.
Lump Sum - any downpayment received an in which cash flow year.
Average Free Cash Flow - is the average of free cash flows (FCF) over the cash flow period. FCF can be defined as net operating profit after taxes - net investment in operating capital.
Buyer Summary metrics include:
Operating Cash Flow / Net Sales - a standard measure of operating cash flow activities. The higher the number the better as it means the opportunity can cover its current short-term liabilities and still have earnings left over.
Comprehensive Free Cash Flow - divides the free cash flow by the operating cash flow. Again the higher the number the better.
Average Free Cash Flow - is the average of free cash flows (FCF) over the cash flow period. FCF can be defined as net operating profit after taxes - net investment in operating capital.
Break Even Year - The break-even point is the point at which total cost and total revenue are equal, meaning there is no loss or gain for the investment by the buyer. In other words, the buyer has reached the level of production at which the costs of acquisition equals the revenues for the opportunity.
Free Cash Flow Graphs
Beneath each Seller and Buyer Summary is a Free Cash Flow (FCF) graph. This graph shows the progression of Free Cash Flows over the cash flow period. In this Buyer example the cash flow period is 5 years.
On the Y-axis we show the Cash Flow and on the X-axis the Cash Flow Year.
Now let's explore the tables from both the Seller and Buyer's perspective presented beneath each graph.
Seller Cash Flow Perspective
Each analysis will include illustrative data for each of the cash flow years.
The table begins by outlining production revenue followed by any revenue from this specific deal illustration including:
Lump Sum Payments - any down payment received.
Fixed Payments - any guaranteed payments received.
Contingent Continuity Payments - any non-guaranteed payments received.
Following this, the table illustrates both pretax and after tax net income.
Lastly, the Free Cash Flow for the cash flow year in question is presented.
Buyer Cash Flow Perspective
Each analysis will include illustrative data for each of the cash flow years for up to two (2) buyers.
Take note that at the top of the table, the cash flow year in which the Buyer breaks even is highlighted in blue. In the case of this example, the Buyer's break even year is year 4. Of course depending on the illustration configuration including number of cash flow years to analyze a break even year may not occur.
The table begins by outlining production revenue:
Revenue Growth - the annual revenue growth assumption used in the analysis.
Personal Production - the buyer's production from their existing practice.
Acquired Production - the buyer's production attributed to their acquisition target / seller's practice.
Total Production - the combined production from both the buyer's own practice and the acquired practice.
Payout Rate and Payout - represents the take home compensation for the advisor.
Next, it details any deal structure expenses:
Fixed Payments - any annual guaranteed payments to the Seller.
Contingent Continuity Payments - any non-guaranteed payments to the Seller.
Following this, the table illustrates both pretax and after tax net income.
If there is any lump sum down payment, this is captured after taxation. Also, if any of said lump sum was financed then the loan repayment is then illustrated along with the debt service ratio.
Lastly, the Free Cash Flow for the cash flow year in question is presented.
Editing Your Cash Flow
Pre-populated cash flows and cash flows created from scratch can be edited and saved directly from the illustration itself.
To edit your cash flow, click the "Edit" button at the top of the right-hand margin next to the Summary header.
From there you can make adjustments to any of the inputs used in the illustration.
When completed with your edits, be sure to scroll to the bottom and click "Update and Save".
Downloading Your Cash Flow Analysis
The illustration can be downloaded for offline review and analysis. Simply click on the "Download PDF" button at the top right hand of the illustration.
For questions about cash flow analysis or deal structure, please reach out to a Succession and Acquisition Consultant at PracticeExchangeSupport@raymondjames.com or give them a call at (727) 567-7097.