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Knowing Future Cash Flow

By Alan Beaulieu on October, 4 2021

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Alan Beaulieu

With a reputation as an accurate, straightforward economist, Alan Beaulieu has been delivering award-winning workshops and economic analysis seminars in countries across the world to thousands of business owners and executives for the last 30 years.

“The future is unknowable because the future is dependent on many possibilities” (Source)

Company B is considering the purchase of Company A, and as a matter of course they estimate EBITDA based on a number of factors, including projected revenue. Here is where there is a definitive need for accurate near- to medium-term forecasting.

Based on the strength of this year, Company B believes that the acquisition target will see Sales climb by 15%, and EBITDA is estimated accordingly. The 2022 revenue figure becomes the basis for a revenue and EBITDA stream into the future. For our purposes, let us assume 2021 revenue of $20 million with EBITDA of 20% of sales for an estimate of $4,000,000. That forms the baseline for future years. It is our experience that it is easy for people to straight-line forecast and assume a constant rate of growth. A 15% annual growth rate with a constant 20% EBITDA yields the followed anticipated EBITDA result:

  2022 2023 2024 Estimated EBITDA Total
Revenue (in millions of $) $23.0 $26.5 $30.4  
Anticipated EBITDA (millions of $) $4.6 $5.3 $6.1 $16.0

 

There is a way to determine a probable annual growth rate with a high degree of confidence. The process includes ITR’s proprietary usage of rates-of-change in combination with specific high-correlation leading indicators. The analytically determined forecast portends growth rates of 5% for 2022, 4% for 2023, and 12% for 2024. The forecast yields the following results given the same results in 2021:

  2022 2023 2024 Estimated EBITDA Total
Revenue (in millions of $) $21.0 $21.8 $24.5  
Anticipated EBITDA (millions of $) $4.2 $4.4 $4.9 $13.5

 

A reduction of $2.5 million in the estimated future cash flow will naturally impact the terms of the purchase to the benefit of the purchaser. That benefit comes at the cost of a reliable look into the future, provided the source of the forecast has a reliable, proven track record. Our track record is on our website, and we are pleased to put it on public display.

If you’re considering a sale or acquisition, we recommend you work with an advisor like the professionals at ButcherJoseph & Co. to help you see the potential benefits and considerations of any transaction type. As a firm specializing in the middle market, ButcherJoseph’s team of professionals has executed more than 200 transactions exceeding $15 billion in total value.

 

Alan Beaulieu
President

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