The Income Approach is the most commonly used approach to value closely held operating companies. Two key components to the Income Approach are the discount rate and net cash flow. As valuation professionals, we spend a lot of time researching, developing and evaluating the discount rate but less time on the net cash flow even though it has a significant impact on value. This session will focus on net cash flow and common complications. We will explore the various measures of net cash flow and how to calculate it. In addition to addressing normalizing adjustments to income, we will discuss adjustments to ongoing EBITDA to arrive at net cash flow including interest (when applicable), depreciation, income taxes (for c-corps and pass-through entities), capital expenditures, working capital changes, and changes to debt (when applicable). After attending this program, participants will have a better understanding of how to determine net cash flow for valuation purposes.
- Define levels and measures of net cash flow
- Describe key considerations for normalizing adjustments
- Computation of adjustments to income to arrive at cash flow
- Calculation of historical and forecast cash flow
- Quantitative risks to be considered in net cash flow (instead of discount rate or DLOM)