What’s My Business Worth? – Calculating Owner’s Discretionary Cash Flow

What is Owner’s Discrtionary Cash Flow (ODCF)? When you are evaluating a business for purchase this is a very important figure to calculate. Also if you are valuating your existing business, you’ll need to calculate this figure to derive the propert market value. A simple answer is “The amount of money a new owner will be able to take home out of the business annually.” Most of the components of ODCF are easy to calculate such as net profit and owner’s salary. Other components may be a little more tricky to ascertain.

The following are the most common elements of ODCF:

• Net Income
• Owner Salary
• Depreciation/Amortization
• Interest Expense
• Non-recurring expenses
• Owner perks such as car, health insurance, etc.

Below is an example calculation of ODCF:

Net Income $150,000

Depreciation 50,000

Interest 25,000

Owner Salary 100,000

Owner Travel (personal) 5,000

Owner Auto (personal) 5,000

Owner Health Insurance 8,000

———–

Owner’s Discretionary Cash Flow $343,000

In this example if the market valuation in your industry is 4x ODCF this business would be worth 4 x $343,000 = $1,372,000.