Debt Free Cash Free Valuation

A Valuation offer where a seller gets to keep all the cash and debt of the business entity but gets a sale offer for business operations.

Enterprise Value is the total value or measure of a company, commonly used by those completing business transactions where the buyer offers to purchase the operations of that business.

The seller gets to keep all the cash and debt of the business entity but gets a sale offer for business operations. This kind of valuation in an offer is called Debt Free Cash Free Valuation.

In layman's terms, if you bought a fully furnished apartment, but the condition arises that all the furnishments will be taken back by the seller of the house, and the seller will also pay the housing loan on the apartment. You will pay a value equal to the property and house.

Used interchangeably in finance, debt-free cash-free for enterprise value. It represents the value of the business after the net debt is removed and is used in making buy offers in letters.

Private equity or big firms generally acquire private companies on a debt-free cash-free basis. However, there are certain assumptions as to what will be considered cash and what will be considered debt.

Valuation Models and Determining DFCF value

Legendary investor Warren Buffet quotes, "Managers and Investors alike must understand that accounting numbers are the beginning, not the end, of the business valuation."

Few financial pundits say businesses are not valued on what has been put into them instead of on what can be taken out of them. To a certain extent, this looks true in the Debt-free Cash-free Method.

Taking 'n' several factors, analysts use various models to find the actual value for the business in question. 

Valuation models are both art and science; science includes all the techniques and numerical concepts used during valuation, whereas it is art because much of it is still subjective to the person performing the valuation.

Valuation models are generally based on intrinsic or relative value, and there are different methods under the same, like:

1. Market Value-based model:  A valuation method in which values of enterprise assets, tangible or intangible, are ascertained by relating them to sale value or market prices of comparable businesses sold.

E.g., X Ltd's goodwill value is ascertained by comparing it with Y Ltd's goodwill, a firm trading in the same products and under the same industry.

2. Asset approach:  The valuation approach based on being calculated by determining the net asset value of the business is known as the asset approach. It is calculated by subtracting net liabilities from the firm's total assets.

3. Cash flows method:  By forecasting the company's future cash flows, the cash flow method determines the present value of the business by projecting future cash flows.

Determining Debt-free Cash-free value

As extracted from the above words, the seller gets to keep the cash and pays the debt.

A buyer can find DFCF value by multiplying business earnings with a multiple to use in the offer letter.

DFCF = EBITDA * Multiple

Where the value generally signifies that bank claims of business were removed, considering business value before we take account of the net liabilities owed to the banks.

A good multiple could be found by considering consistent values in business; it may be earnings before financing costs as removing liabilities owed to the bank.

The varied essentials to calculate DFCF are given above, with the formula being the most important.

Buyers could conduct some research on how other businesses of the same line were solved or the value at which they are trading. This helps them in determining the correct multiple to estimate enterprise value.

Components of Debt and Cash

The components are: 

1. Debt: While valuing businesses for debt-free cash-free transactions, the followings may be considered debts.

  • Leasing Obligations: A landlord gives the third party the right to use property under the agreed terms for a fixed period in return for rental payments or considerations are termed as leasing obligations.
  • Outstanding Tax Obligations: A certain amount of tax debt levied is due to the levying authority, such as the Income Tax department. They are termed O/S Tax Obligations. These obligations may be due to persons, entities, or corporations.
  • Deferred Revenue: Revenue received in advance for the services yet to be provided termed Deferred revenue. E.g., a customer paid for a prepaid plan to the OTT services platform for supposedly one year. Here the revenue for one year is termed as deferred revenue because services for the same will be rendered in the coming year.
  • Off-Balance sheet Liabilities: Liabilities that may or may not occur at a future date and don't require to be reported as per accounting standards are known as off-balance sheet liabilities. E.g., a liability for the firm will arise only if the company loses the court case at a future date.

2. Assets as in Cash/Equivalence:

  • Bank Balances: Closing Balances appearing on the bank statements of the different bank accounts of the firm are known as bank balances.
  • Cash in Hand: Closing cash balance appearing on the balance sheet, which is accessible to businesses for instant use, is known as cash in hand.
  • Petty Cash: Appearing under the current assets section of the balance sheet, It is used for day-to-day expenses, and its closing balance appears on the balance sheet.
  • Rental deposits: Deposits paid by the tenants to landlords at the beginning of tenancy are known as Rental deposits. Generally, these are treated as security deposits and equal to one month's property rent.


The below example shows the application of the DFCF Model with the pros and cons of the model:

Texas Solutions ltd is being acquired by Molly Softwares ltd as they are considering making the Debt-free cash-free offer. Based on the EBITDA of the firm and earnings, Molly assumes the enterprise value of Texas Solutions to be 10M$.

The balance sheet of Texas solutions shows 1M$ debt and 500k$ cash, of which 75k$ both firms have agreed to consider as operating cash, i.e., necessary and required to run the day-to-day business.

Now it's up to Texas solutions to accept the offer of 10M$ as enterprise value, assume all the firm's debt and cash, and hand over the business's operations to Molly.

Therefore, Texas solutions will be supposed to get 10M$ for sale; they will pay the debt of 1M$ and retain cash amounting to 425k$. As the new business acquired by Molly's is debt-free, enterprise value, i.e., 10M$, will be equal to the equity value of the new firm.

Pros and cons

The pros and cons are:

1. Pros:

  • Easy to calculate - Calculating valuation is easy through this method as it involves less quantitative calculations and technicality.

  • Encourages fair play-  Through inviting competitive bids and negotiations, this valuation method and settling business transactions offer fair play among stakeholders.

2. Cons:

  • Causing Conflicts- A conflict may arise among stakeholders regarding what should be considered cash and debt. In addition, various stakeholders might disagree with offers as every party must be trying to maximize their benefit.

  • Accuracy of Multiple used-  While the formula used to calculate enterprise value is EBITDA * Multiple, the multiple is supposedly determined by stakeholders mutually. Therefore, it may not be easy to agree on the accuracy of multiples being used.

Debt Free Cash Free Valuation A simple yet effective way to settle mergers and acquisitions through simple transactions. As the acquirer knows what exactly they are getting out of the business and the value for operations.

This transaction method helps ease the complexity of M&A by allowing both parties, i.e., acquirer and seller, to have a clear picture of the acquisition.  

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Research and authored by Arshnoor KambojLinkedIn

Edited by Colt DiGiovanni | LinkedIn

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