Valuation in turbulent times: steady cash flows as a compass

Written by: André Scheirlinck

When an entrepreneur considers selling his business, one question invariably takes center stage: what is my business worth? Valuation is therefore an indispensable part of any sales process. Not only to give direction to the price negotiations, but above all to gain insight into what drives the company – and what makes it future-proof.

In an economy where uncertainties are piling up, sellers are looking with a keen eye at the robustness of their business. How much resilience is there in the earnings model? How much “fat on the bones” is there to absorb setbacks? At the same time, buyers are not sitting still. They want to be sure that projected results are achievable – and will remain so – and test them carefully.A common mistake in thinking is to base the value of a company on historical profit figures. Value does not arise in the past, but in the future. Remember the corona crisis, which in one fell swoop brought down the profitability of entire industries. Therefore, valuing is not about accounting profits, but about future free cash flows. What cash comes in – and what flows out again? At the same time, major themes in the macro-economic field, sustainability and labor market tightness are at play, making the future seem more difficult to predict. It is therefore important to understand different scenarios from different perspectives.

The discounted cash flow method (DCF) charts this flawlessly. Here, future free cash flows, based on strategy, market position and value drivers, are discounted against a return requirement that fits the risk profile of the company. This creates a valuation based on economic reality – not on the past, but on the potential.And that potential is often hidden in places unexpected to entrepreneurs. Take working capital: an area where many entrepreneurs miss opportunities. Inventory and accounts receivable appear valuable on paper, but in reality hold precious liquidity. Only when you succeed in increasing the turnover rate, real cash becomes available and the return on invested capital increases. This creates value.

So strong value creation starts not only with increasing market share or implementing new technology, but also with optimizing internal processes. Companies that manage their cash flow tightly, are agile and adapt quickly to changing market conditions demonstrably impress potential buyers.Thus, valuing a company is not a calculation, but a story. A story about the future, cash flows, resilience and vision. And if that story is right – then potential buyers and the deal will naturally follow.

This column appeared in Zaan Business No. 1 – March 2025.