From this net earnings figure, a cash flow statement and projection can be constructed with the assistance of an accountant. The cash flow projection will help determine if the business can pay for itself and, more importantly, if the desired rate of return is achieved on the investment. In addition to balance sheet accounting figures, buyers should check gross profit figures against industry benchmarks. Access to this information will show a new owner possible areas to improve the business. Also, the potential buyer should determine what the facility's current level of utilization is, and if it can be increased through improved marketing and management techniques.
Underutilized facilities are prime targets for acquisition by a growing concern.
Buying based upon existing performance, then improving that performance without major capital improvements, increases the profitability of the investment. One common method for determining the desirability of an investment is to determine the present value of the shop's future cash flow. This method of analysis examines the cash flow of the business against a time-adjusted rate of return. For simplicity's sake, think of IRR as the cost of capital or the opportunity cost of the investment. In the cash flow projection chart, we have determined the Present Value of cash flow for each of the ten years in the projection.