When an interested party makes an offer to buy a business, this is most often to acquire all the issued share capital of the company, known as the Total Consideration, on a cash and debt-free basis subject to a normal level of working capital and minimum maintained cash remaining on the balance sheet of the business at completion.
A company’s valuation, the Enterprise Value, is essentially a function of its future cash flow except in rare situations where net asset liquidation leads to a higher value. The company’s earnings before the date of valuation are useful in predicting the future results of the business under certain conditions. The second key in this principle is cash flow as it considers capital expenditures, working capital changes, and taxes.
The DCA Corporate valuation approach is based on the company’s historic performance (after tax profits and adjusted net cash flow). Although future business forecasts are an indicator, these figures are not factored into our calculations as the incumbent management team will be in the best position to evaluate the prospects of the business.
This approach, along with commercial due diligence performed on the sector and what can be realistically funded, will be principal drivers behind the profit after tax multiple applied in arriving at the Enterprise Value.