The foundation of value in a business is its ability to generate future cash flow from its core operations. Most buyers run their valuations based on Discounted Cash Flow (DCF) models. Under this method, value is independent of the capital structure of the company. In other words, the starting point for negotiations of most business sales is a proposed transaction where at closing, the seller retains all cash and pays off all long-term debt at the moment of closing.
As sell-side bankers focused solely on middle-market aerospace and defense companies over the past 22 years, we’ve seen a wide range of balance sheet structures. Some have high debt and little cash, others just the opposite. The rationales for the differences are many: leveraged returns, risk aversion, tax strategies, etc. But when it comes to advising our clients on what their company is worth, we always do so on a “Debt Free, Cash Free” basis, because this is how 99% of buyers calculate values and negotiate purchase prices.
Have a great day everyone.
Managing Director, Aerospace