Cash Really Is King

History Shows That Cash Is King: What really matters when it comes to investing? Back in the early 2000s many internet businesses started springing up all over the web. Many of these businesses were small companies working out of their home or a small shop and they offered products at a discount. In order to draw attention to themselves these companies were accepting a loss on the products they were selling, but the amount of volume they were experiencing was out of the roof.

It was the volume that attracted many investors. The mentality was that if the companies were doing this amount of volume then it would eventually become highly profitable. Once the DOT COM bubble popped and they realized how silly the valuations were, the investors started to realize even further that cash really is king.

Why Free Cash Flow Is the True Measure of Business Value

Most experienced capital allocators focus not on reported earnings but on free cash flow — the cash a business actually generates after covering the capital expenditures required to maintain its competitive position. Earnings can be massaged through accounting choices; cash cannot hide. When a business consistently converts a high percentage of its operating income into free cash flow, it demonstrates operational efficiency and pricing power that buyers and lenders both prize. For owners preparing to sell their business, understanding this distinction early can shape how they present their financials and position the story with prospective buyers.

What Really Creates Value: When an investor risks hard-earned capital in an opportunity, he or she is looking for a healthy return on the investment.

When one buys a bond the Net Present Value (NPV) of the bond is based on the expectations of future cash flows. The expectations are then discounted using a present valuation formula and that provides the value.

Issues With the NPV Method of Valuing a Business

Probably the biggest issues with valuing a company is dealing with the number of variables included in the calculation.

When you value a bond the numbers are pretty straight forward because the coupon shows what the future payments will be while the market rate shows what to discount the bond by; both numbers are a given. When valuing a company you look at current and historical cash flow and you look into the market potential in order to project — make an educated guess on — what the cash flows will be.

Essentially the rearview mirror is used to drive forward. Then, you come up with a discount rate. This is one point that is probably the biggest guess of them all. What are the future cash flows worth to you?

For a deeper exploration of how EBITDA differs from true cash flow, practitioners should understand the specific add-backs and deductions that separate the two figures before relying on either metric in a valuation model.

Using an EBITDA Multiple

Rather than dealing with all of the guessing games to value a business, many investors will start with an adjusted EBITDA multiple of approximately 4x.

After reviewing the company they will adjust that number up or down based on the future expectations of cash flow, risk, and market expectations. While it is not as sophisticated, it is actually widely used within the industry.

EBITDA multiples carry intuitive appeal precisely because they are cash-flow-adjacent. They strip away the noise of depreciation schedules, amortization of goodwill, and financing costs to reveal the underlying earnings power of the operating business. For most middle-market transactions, the relevant multiple range shifts considerably by industry, growth profile, customer concentration, and the quality of recurring revenue. A business with long-term contracts and low churn will command a meaningfully higher multiple than one with transactional, project-based revenue — even if their trailing EBITDA figures are identical.

Learning how to accurately calculate seller's discretionary cash flow is equally important for smaller businesses where owner compensation and personal expenses must be normalized before any multiple is applied.

Projecting Forward: Why Historical Cash Flow Still Matters

Despite the forward-looking nature of most valuation models, sophisticated acquirers consistently anchor their assumptions in historical cash flow performance. Understanding how to project cash flow when doing a deal requires blending trailing performance with credible forward assumptions — and being prepared to defend every line of the proforma under scrutiny.

Sellers who can document clean, auditable cash flow histories — with clear explanations for anomalies — are in a far stronger negotiating position than those presenting projections untethered from the past. Buyers will discount aggressive growth assumptions, and lenders will be even more conservative when determining how much debt the business can service.

Deal Capital has had a large amount of experience with previous transactions all over the U.S. and in various parts of Canada that has helped its professionals to understand key indicators associated in valuing in your industry.

Non-Cash Considerations in Deal Structures

Not all value transferred in an acquisition moves as cash at close. Understanding the role of cash and non-cash considerations in mergers and acquisitions — including stock, earnouts, and seller notes — is essential for modeling total transaction value and comparing competing offers on an apples-to-apples basis. A deal structured with a meaningful earnout effectively defers a portion of the cash payment, which changes the risk profile for the seller significantly.

If you are curious about the value of your business and would like to explore what a transaction might look like, consider preparing a transaction overview as a starting point for understanding how buyers and advisors will evaluate your company.

Frequently Asked Questions

Why do investors say cash is king?

Cash-generating businesses can self-fund growth, service debt, and return capital to owners without relying on external financing. During market downturns, companies with strong free cash flow are better positioned to survive and acquire distressed competitors — reinforcing the notion that durable cash generation is the most reliable proxy for long-term business value.

How does NPV differ from an EBITDA multiple in valuing a business?

NPV requires projecting specific future cash flows and selecting an appropriate discount rate — two inputs that introduce significant subjectivity. An EBITDA multiple sidesteps explicit forecasting by anchoring value to a market-derived ratio applied to a single normalized earnings figure. Both approaches have merits; practitioners typically use them in tandem as a cross-check rather than relying on either alone.

What is adjusted EBITDA and why does it matter?

Adjusted EBITDA adds back one-time, non-recurring, or owner-specific expenses to reported EBITDA in order to reflect the true normalized earnings of the business under new ownership. Common adjustments include above-market owner compensation, personal expenses run through the business, and non-recurring legal or restructuring costs. The accuracy of these add-backs is frequently negotiated between buyer and seller during due diligence.

How can a seller maximize their cash flow multiple?

Sellers typically improve their multiple by demonstrating consistent revenue growth, reducing customer concentration, building recurring revenue streams, and maintaining clean financial records. Engaging an advisor well before a planned sale — often twelve to twenty-four months in advance — allows time to address weaknesses that would otherwise compress the multiple a buyer is willing to pay.