I hate subjectivity and guesswork. Business analytics is the art of trying to take the guesswork out of any important business decision where a great deal of money is at stake. Nowhere is this more evident than on the buy-side of an M&A transaction. The subjectivity, variance and chances for mistakes remain very high. And, the most important aspect of the valuation you perform for the business are the assumptions you make and the cash-flow you project. That cash flow, while subjective, will be the basis for determining what you’d be willing to spend in an acquisition scenario. What follows below are some detailed questions worth asking to determine potential cash flow in your assessment of the acquisition of a business. Keep in mind, many of the answers are subjective and qualitative and will still require a basis and assumptions to equate them to an income statement.
While my list here is far from being exhaustive, it should be a good reflection of some of the qualitative areas which will need to be assessed before a deal is finalized. Assessing “real” cash flow can take hours or up to weeks, depending on how “real” the numbers are and how correctly they reflect the true performance of the company. For the LBO buyer in particular, it will also be desperately needed to know how much cash will be needed at closing and for the working capital requirements for years to come.
It’s unfortunate that most deals are difficult to find and when the good deals are found, the numbers may not reflect the true value of the cash flow.