Optimize for maximizing net cash flow instead of net profits
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Red Rocket has been looking for a businesses to buy. We have previously written about all the challenges that come with buy-side mergers and acquisitions work. But there is a new wrinkle we have been running into, that is worth talking about. Most businesses we have looked at were managed to maximize net profit, which is typically a good thing. But when trying to attract an acquirer, they really should have been managed to maximize net cash flow. As at the end of the day, that is really want matters most to investors—getting visibility into a near term return of their invested capital, that hopefully can pay back in 12-18 months, not 4-5 years. Let me explain further.
Defining The Difference Between Net Profit and Net Cash Flow
Net profit is a pretty straight forward calculation; it takes all the revenues of the business collected from customers in a time period and…