investment bank logoinvestment bank logoinvestment bank logoinvestment bank logo
  • ADVISORY
    • BUY SIDE M&A
    • SELL SIDE M&A
    • CAPITAL RAISE
    • BUSINESS VALUATIONS
  • DEALS
  • ABOUT
  • CONTACT

How to Project Cash Flow When Doing a Deal?

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.

  • What are the projections provided by internal management? Are the projections they’ve given reasonable? What assumptions were made in the drafting of said assumptions?
  • When looking to the future, does the company have a good track record of meeting management cash flow projections in the past?
  • What does the industry look like? Is it growing? Is it in decline? How does the target look vis-a-vis the other competing firms in the industry? In other words, does the company have a secure and competitive position in their market niche? Are there barriers to entry to ensure at least the status quo? Nothing is worse than a significant decrease in cash flow after a buy.
  • How cyclical are the cash flows? If they’re not steady, how will your analysis take this into consideration?
  • How does management expect the company to grow? What assumptions are included in their growth expectations?
  • What are the working capital and fixed asset requirements for implementing management’s growth plans?
  • If the business is seasonal, what working and fixed capital is needed during peak times of the year? How will this effect cash flow?
  • Not that you could predict them, but what macro and micro events may play a role in cash flow? (could include competition, foreign competition, strikes, loss of suppliers, currency fluctuations or a whole host of other issues)
  • Are there assets, divisions, subsidiaries or other units that should be sold to improve efficiency? If sales of such assets or subs were made, how long would they take, how much money would they net and how would the money be reinvested?
  • What are–if any–other sources of cash from the business?
  • What are all the areas in which the deal could go very wrong? In thinking through the details of this question, does current management have contingency plans in place in the event that worst-case scenarios are played-out to the max?

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.

  • Author
  • Recent Posts
Nate Nead
Nate Nead
Nate Nead is a licensed investment banker and Principal at Deal Capital Partners, LLC, a middle-marketing M&A and capital advisory firm. Nate works with corporate clients looking to acquire, sell, divest or raise growth capital from qualified buyers and institutional investors. He holds Series 79, 82 & 63 FINRA licenses and has facilitated numerous successful engagements across various verticals. Four Points Capital Partners, LLC a member of FINRA and SIPC. Nate resides in Seattle, Washington. Check the background of this Broker-Dealer and its registered investment professionals on FINRA's BrokerCheck.
Nate Nead
Latest posts by Nate Nead (see all)
  • Covid-19 Impact on US Private Capital Raising Activity in 2020 - May 27, 2021
  • Healthcare 2021: Trends, M&A & Valuations - May 19, 2021
  • 2021 Outlook on Media & Telecom M&A Transactions - May 12, 2021
Nate Nead
Nate Nead
Nate Nead is a licensed investment banker and Principal at Deal Capital Partners, LLC, a middle-marketing M&A and capital advisory firm. Nate works with corporate clients looking to acquire, sell, divest or raise growth capital from qualified buyers and institutional investors. He holds Series 79, 82 & 63 FINRA licenses and has facilitated numerous successful engagements across various verticals. Four Points Capital Partners, LLC a member of FINRA and SIPC. Nate resides in Seattle, Washington. Check the background of this investment professional on FINRA's BrokerCheck.

Related posts

May 27, 2021

Covid-19 Impact on US Private Capital Raising Activity in 2020


Read more
May 19, 2021

Healthcare 2021: Trends, M&A & Valuations


Read more
May 12, 2021

2021 Outlook on Media & Telecom M&A Transactions


Read more

Get in touch

[]
1
Step 1

keyboard_arrow_leftPrevious
Nextkeyboard_arrow_right


investment banking Logo

Services

  • M&A Advisory
  • Sell-Side M&A
  • Buy-Side M&A
  • Raise Capital

About

  • About Us
  • Our Deals
  • M&A Blog
  • Contact Us

© Copyright Deal Capital Partners, LLC.

Privacy Policy | Terms of Service | Listing Agreement

This does not constitute an offer to sell or a solicitation of an offer to buy any securities and may not be used or relied upon in connection with any offer or sale of securities. An offer or solicitation can be made only through the delivery of a final private placement offering memorandum and subscription agreement, and will be subject to the terms and conditions and risks delivered in such documents.

M&A advisory services offered through MergersandAcquisitions.net. Securities transactions are conducted through Four Points Capital Partners, LLC (4 Points), a member of FINRA and SIPC. Deal Capital Partners, LLC and 4 Points are not affiliated. Check the background of this Broker-Dealer and its registered investment professionals on FINRA's BrokerCheck.

An Invest.net Partner