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Economic Updates

Knowing Future Cash Flow

Posted by Alan Beaulieu on Oct 4, 2021 9:25:24 AM

“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

Topics: News