A letter written by a buyer offering to purchase a company might commonly contain the words: “this offer is made on a debt free cash free basis”. In this valuation course module we explain:
What debt free cash free valuations are;
Why they are used;
How debt free cash free valuations are determined; and
How ‘debt free cash free’ compares to another term commonly used in finance: “enterprise value”.
Debt free cash free company valuations: what are they?
Imagine a typical company which has some amount of net debt (where net debt equals debt less cash that could be applied to refinancing that debt). Imagine too that those net liabilities could magically be removed, perhaps by a magnificent benefactor or a fairy godmother – someone who could work a wonder over the company and take away its net debt. Without those net liabilities, magically the company’s value would increase. That’s the debt free cash free valuation: the value of the company imagining it had no net debt.