Previously, in Deal Note® 38, we covered some of the most commonly used M&A acronyms: LOI, CIM, VDR, and PA—all critical to selling your aerospace and defense company. But the M&A process is full of specialized terms, and we’d like to introduce a few more that future sellers should understand and recognize EV, TTM, DCF, and DRL / DDTR.
Enterprise Value (EV) is the total value of your business, regardless of how much debt you do or do not have. EV reflects the amount that a buyer would pay to acquire 100% of your business.
One-way buyers derive EV is by applying a multiple to Trailing Twelve Month (TTM) EBITDA (Deal Note® 59). If your business is growing, using TTM can provide a higher valuation than last year’s financials would imply. Another valuation method buyers use is Discounted Cash Flow (DCF). Over the past 24 years, we have found this to be the most important valuation method used by buyers and the method they rely upon the most. A DCF values your business based on the present value of its future cash flows.
When due diligence begins, most buyers will focus the majority of their efforts on accessing those issues and factors that they believe could impact cash flows in the future, after they buy the business. During this process, you will be dealing with a Diligence Request List (DRL) or Due Diligence Tracking Report (DDTR) as discussed in DN® 118. These documents outline everything the buyer (wants to review, from financial records to customer contracts.
Selling a business is complex. By understanding these terms and understanding the terminology before you start the sale process, you’ll be better prepared to navigate the entire process including valuation discussions, deal structuring, and due diligence.
Have a great day,
Max McFarland
Associate
