Certified Valuation Analyst (CVA) Practice Exam

What does seller's discretionary cash/income evaluate compared to other measures?

1. Individual owner's revenue

2. Company's total revenue

3. Potential investor interest

4. Management efficiency

The correct answer is: Individual owner's revenue

Seller's discretionary cash/income is a critical measure used to evaluate the overall financial health of a business from the perspective of a potential buyer. It adjusts the business's earnings by adding back the discretionary expenses that an owner might include or exclude from the financial statements. This often encompasses the owner's salary, personal expenses, and any non-recurring items that do not reflect the ongoing operations of the business. By focusing on individual owner's revenue, this metric provides a clearer picture of the cash flows that a new owner could expect to receive from the business. It effectively represents the amount of money available to the owner after normal operating expenses are paid, which is particularly valuable for a buyer assessing the potential return on their investment. Other metrics, such as the company's total revenue, offer insights into overall sales performance but do not account for the owner's discretionary spending patterns. Measuring management efficiency focuses more on operational effectiveness than on the cash available to the owner. Similarly, potential investor interest could be influenced by various market factors that may not directly reflect the owner's financial benefit. Thus, seller's discretionary cash/income specifically highlights what an individual owner can realistically expect to take from the business, making it a pivotal evaluation tool in business valuation.