9
O P I N I O N
The AEC ‘factory’
O ver my career, I have had some disappointed clients. I am not talking about the disappointment you feel from realizing you ordered the wrong entrée at dinner. I am talking about the disappointment you feel when you realize your firm is worth much less than you expected. Firm managers run a production process. If the deliverables get out the door, great. If not, cash flow – and company value – could be harmed.
Hobson Hogan GUEST SPEAKER
Most owners look back and wish they had focused on increasing revenue, improving margins, or cutting costs, when they really should have been focused on improving cash flow. Why is this important, you may ask? The fact is buyers, and great investors, focus on free cash flow – cash flow less capital expenditures. Free cash flow drives your value far greater than any other metric – period, full stop, drop mic. At this point you may be confused because you may be under the impression that the value of your firm is derived from EBITDA. The answer is no, EBITDA is simply a proxy for deriving value because calculating free cash flow requires a little work and people are lazy, at least when it comes to corporate finance. Put simply, your value is the sum of your future free cash flow divided by a capitalization rate. After all is said and done, the
free cash flow method is what matters the most. Firms all across the economic spectrum that have focused their management efforts on it have generated wealth well beyond their peers. The mindset of an owner that contemplates the power of free cash flow is they focus on getting paid; more specifically, getting paid faster. I am “Firms all across the economic spectrum that have focused their management efforts on [free cash flow] have generated wealth well beyond their peers.”
See HOBSON HOGAN, page 10
THE ZWEIG LETTER March 4, 2019, ISSUE 1286
Made with FlippingBook Annual report