June 2025
Cash flow is the movement of money in and out of a company over a period of time. If the company’s inflows of cash are more than its outflows, its net cash flow is positive. If outflows exceed inflows, it is negative. Free cash flow is the money left over after a company’s operating expenses and capital expenditures.
Cash flow is calculated many different ways depending on the purpose of the valuation. Net cash flow is the excess of cash inflow over cash outflow. The calculation of net cash flow when valuing a business must match the calculation of net cash flow used by the source of the base discount rate used in the valuation. A common calculation of net cash flow when valuing a business is net income plus depreciation/amortization less maintenance capital expenditures. Net cash flow is similar to net income but net income is net of expenses like depreciation that don’t require cash expenditures. A common cash flow metric when valuing a business is EBITDA or earnings before interest, depreciation and amortization. Its capitalization produces an enterprise or invested capital value since it doesn’t include interest expense.
For accounting purposes cash flow is broken down as cash flow from operating activities, cash flow from investing activities, and cash flow from financing activities. However, when valuing a business the total cash flow is typically capitalized into value.
In summary, cash flow is calculated in a number for different ways when valuing a business depending on the purpose of the valuation. Common measures of cash flow used to value a business are net cash flow and EBITDA.
Relevant Court Cases
-
Facebook, Inc. & Subsidiaries v. Commissioner
of Internal Revenue,
U.S. Tax Court,
No. 21959-16,
filed May 22, 2025
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Naiman v. Naiman,
Court of Appeals Twelfth Appellate District
of Ohio,
Case No. CA2024-06-074,
opinion filed May 5, 2025
Recent Business Valuation Articles
-
“Unlocking Mobility: Does
Banning Non-Compete Agreements Create
Shareholder Value?,”
by Ya Liu, Buhui Qiu and Teng Wang,
dated June, 2025
-
“Do GPs truly present fair
value? The case of continuation
funds,”
by Jinhyeong Jo and Doojin Ryu,
dated April 12, 2025
Recent Engagements
- Valuation of the common stock of an
industrial products supplier on a
minority interest basis for
gift tax reporting and planning
purposes.
- Valuation of the common stock
of a construction and service
company providing HVAC solutions
on a controlling interest basis
for Employee Stock Ownership
Plan purposes.
- Valuation of an undivided
interest in real property on
a minority interest basis
for estate tax reporting
purposes.
- Valuation of non-voting
common stock of a niche
industrial service provider
on a minority interest basis
for purchase/sale
purposes.
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