Steps for Completing the
Proforma Cash Flow to Calculate Purchase Price

This form/worksheet supplies very useful information for you as prospective buyer (or as prospective seller).

This is a form for your convenience.  It is really easy to complete.   It is just for your use.  It is not a part of the information that we need from you to do a pre-approval.  We don't need it for your formal application either.  However, the relationships between the financial information and the loan terms are the same as when we analyze your formal loan request.

You may want to create a folder on your computer just for this original form and for your completed versions of the form that you have made.  You could name the folder something like "ProFormas for ABC Car Wash".  You can save the worksheet page to that folder (or any other folder).  You may want to 'Save As' a worksheet/form named "Proforma to Price for 12 31 2005".  In this way you can make a file for each year (or short period) that your are analyzing.  And you can re-open these files in your web browser (Explorer, Navigator, etc.) to make adjustments as you see are necessary.

You can print the worksheets on your printer and you can attach them to e-mails to send to partners or other interested parties.

The calculation software is embedded in the web page itself.  You can use the form on your computer as a standalone worksheet.  You don't have to be connected to the web site to use the form on your computer, and you don't even have to be connected to the Internet.  Very cool.

1.  On the top line enter the actual pre-tax net income for an annual period, usually for an annual period such as for the year ended 12/31/2005. (You could create additional files for the period ending 12/31/2004, 12/31/2003, etc.

For a Subchapter S, corporate tax return (Form 1120S) the pre-tax net income is normally labeled on the first page of the tax return as 'Ordinary Business Income (Loss)' on Line 21.

For a partnership, including LLC, tax return (Form 1065) the pre-tax net income is norally labeled on first page of the return as 'Ordinary business income (loss)' on Line 22.

For a personal tax return Schedule C, this is normally labeled 'Tentative profit (loss)', Line 29.

Make sure that you are using net income and expense numbers that are just for the subject car wash, not commingled with any other car wash or other business.

2.  Add ALL of the Interest Expense for the period.  Almost all car wash purchases are 'asset' purchases, not 'stock' purchases, so the buyer does not take on any of the seller's interest bearing liabilities.

Form 1040, Schedule C, Lines 16a, Mortgage; and 16b, Other;
Form 1120S, Line 13, Interest.
Form 1065, Line 15, Interest.

3.   Add back the Depreciation Expense and Amortization Expense for the period.  These are non-cash expenses.  Depreciation Expense and Amortization Expense are found in two different places within the federal income tax return.

a.)  The Depreciation Expense can be found in these places on these respective forms:

Form 1040, Schedule C, Line 13, Depreciation;
Form 1120S, Line 14c, Depreciation.
Form 1065, Line 16c, Depreciation

Look for additional depreciation expense in the supporting schedule for Cost of Goods Sold (Schedule A), although this is not frequent.

b).  For corporate and partnership tax returns the Amortization Expense is normally in the Supporting Schedule at the back of the return.   This schedule is labeled by the tax preparer or tax preparation software as 'Statement...Other Deductions'.  This schedule is the detail of the miscellaneous expenses that totals to the same amount as the Other Deductions on the front page of the tax return.  For a personal tax return the schedule is the 'Supporting Schedule' or 'Statement'  for the Other Expenses on  Line 27 of the Schedule C.

4.  If you are buying at least the land and building, but the tax returns or income statements show a 'Rent' expense for those payments made by the subject car wash to the seller, or to other parties, you should be able to add all of that expense back.  If you will continue to have a lease payment, in the top section you may need to add-back the lease payments made by the seller, then in the bottom section deduct the NEW lease payments that you will be making under your ownership.

5.  You may be able to determine from 'in-house' statements (as opposed to Tax Returns that lump all insurance together) that there has been a health insurance expense.  If you will have health insurance from your or your spouse's employer you want to add-back this expense if under your car wash ownership you will not have this expense from the car wash revenue.  Other examples are unusually large automotive, travel, entertainment, or cell phone expenses.  Some sellers also support college-age children or other relatives through the car wash payroll, although that child or relative may not work at the car wash at all.  These amounts would be added back, but as buyer you want to make sure that all positions at the car wash are covered.

6.  You may be able to add-back officer salaries and guaranteed payments to partners, then deduct the amount of money that you will require for your living or other expenses on the line labeled 'Withdrawals REQUIRED by New Owner, if any (annualized)'.

In general, identify expenses that are more personal than business.

You may also need to add expenses that have been underreported, or where the expenses for an expense item needs to be higher.  Two good examples are advertising and maintenance.  Some sellers will defer maintenance and repairs, and will reduce their advertising expenses, when they know that they will be selling.  Reducing these outlays in the short-term can temporarily boost cash flow. (This is known as 'dressing up the financial statements').  This can deceive a would-be buyer into believing that cash flow is normally higher than it really is.  Don't be afraid to adjust expenses higher where it seems from your other research that those expenses are too low on the historical statements.

One mistake that we see some buyers make with regards to expenses is to add back too much.  Most car wash buyers will have about the same operating expenses as the seller has had.  So, you don't want to be too aggressive in adjusting expenses except where the expense needs to be higher, such as for advertising,

Alan Bussey      Car Wash Loans     903-876-2308     fax:  484-737-1092

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