What Does Debt Free Cash Free (DFCF) Mean?
Debt free cash free (DFCF) is a method of valuation of the target company during an acquisition transaction. The DFCF valuation accounts for the value of a business and excludes financial impacts of net cash or net debt held during the closing process.
Divestopedia Explains Debt Free Cash Free (DFCF)
The DFCF calculation is a standard of measure used for merger and acquisition transactions in order to arrive at a purchase price. During the due diligence process, the target company and the acquirer must identify which items are considered cash (for example, customer deposits) and which items are considered debt (for example, tax liabilities). The target company then pays off all the debt and keeps all the remaining cash. Once the debt free cash free valuation is agreed upon, the final purchase agreement is drawn up and the deal transaction is completed.
There are several advantages in using the debt free cash free valuation. It provides the target company with a basis in which to compare all offers received. In addition, it allows the acquirer to focus on the business value as all of the target company's financial trends remain the same while the cash and debt fluctuates during the closing process.