If It Is All About Future Cash Flows Shouldnt I Show A Huge Growth Forecast?

If the future cash flows of the business are one of the keys to determining value, then it makes sense that the forecast should be presented in a manner that shows dramatic growth as in the graph below.

Zenith Manufacturing Co. EBITDA Forecasts

20,000,000 15,000,000 10,000,000 5,000,000 3 years ago 2 years ago last year next year 2 years out 3 years out

Historical EBITDA

Aggressive forecast

Realistic forecast

Zenith Manufacturing has had a very impressive track record of consistently growing EBITDA on an annual basis, though the growth has been typically in the range of between 5% and 10%. The aggressive forecast shows growth profiles at approximately 33% for next 3 years and EBITDA at levels never even approached by the company before. When forecasts like these are put forward as the companys future prospects there are two problems that arise. The first is the question of integrity of management, whether or not the vendors are actually dealing in good faith. The second problem, is that even if management insist the forecast are real, since a transaction generally evolves over a period of several months if the business is not tracking to achieve the forecast, the purchaser will be looking for purchase price revisions. The best scenario is to put forward a well thought out, fully supported forecast that although may be optimistic, it is still reachable for the company. In the graph above it is shown as the Realistic forecast that reflects 8% growth over each of the next of three years, which is relatively consistent with the growth profile for the past three years. To forecast more will result likely result in the forecast being discounted significantly by potential purchasers and will generally result in reduced offer prices for the business.

If It Is All About Future Cash Flows Shouldnt I Show A Huge Growth Forecast?

ABOUT EQUICAPITA
Equicapita is a private equity fund that acquires established, private, small and medium sized enterprises (SMEs) located primarily in Western Canada. Equicapitas investment drivers are to acquire operating companies at attractive valuations, with a history of generating sustainable cash flow and proven management teams. Equicapita believes that there is: - a generational opportunity to acquire baby boomer SMEs; and - a funding gap in the $2 to $20 million enterprise value range. The retirement of baby boomer business owners has been described as triggering one of the biggest transfers of corporate assets on record in Canada. This creates an environment with an abundance of opportunities to acquire SMEs with long-term operating histories, at attractive cash flow multiples. Equicapita provides investors with access to this alternative asset class via an efficient RRSP eligible structure.

DISCLAIMER
The information, opinions, estimates, projections and other materials contained herein are provided as of the date hereof and are subject to change without notice. Some of the information, opinions, estimates, projections and other materials contained herein have been obtained from numerous sources and Equicapita and its affiliates make every effort to ensure that the contents hereof have been compiled or derived from sources believed to be reliable and to contain information and opinions which are accurate and complete. However, neither Equicapita nor its affiliates have independently verified or make any representation or warranty, express or implied, in respect thereof, take no responsibility for any errors and omissions which maybe contained herein or accept any liability whatsoever for any loss arising from any use of or reliance on the information, opinions, estimates, projections and other materials contained herein whether relied upon by the recipient or user or any other third party (including, without limitation, any customer of the recipient or user). Information may be available to Equicapita and/or its affiliates that is not reflected herein. The information, opinions, estimates, projections and other materials contained herein are not to be construed as an offer to sell, a solicitation for or an offer to buy, any products or services referenced herein (including, without limitation, any commodities, securities or other financial instruments), nor shall such information, opinions, estimates, projections and other materials be considered as investment advice or as a recommendation to enter into any transaction. Additional information is available by contacting Equicapita or its relevant affiliate directly.

If It Is All About Future Cash Flows Shouldnt I Show A Huge Growth Forecast?