Optimize Cashflow vs EV - Which should you buy? What do you do if you are already operating? - ETA CFO

We're ETA-focused CFOs. We keep trying to find ways to drive value to the ETA community.

We came up with this framework to think through Cashflow vs Enterprise Value.

Rocketship:

• Description: High cash flow and high enterprise value—these businesses are in growth mode and attracting market attention.

• Strategy: Reinvest profits into growth opportunities like R&D or acquisitions to maintain momentum until growth becomes more challenging.

• Example: A healthcare software company with proprietary technology that’s generating substantial cash flow and has a strong market position might invest in acquiring smaller tech firms to expand its product offerings.

Golden Goose:

• Description: High cash flow but low enterprise value—profitable but not highly valued by the market.

• Strategy: Focus on optimizing profits rather than scaling, using cash flow to invest in other assets like real estate or stocks.

• Example: A boutique consulting firm with a steady client base and a long waitlist could focus on raising rates instead of hiring more staff, using the extra cash flow to buy rental properties and diversify its income.

Hot Prospect:

• Description: Low cash flow but high enterprise value—potentially valuable with future growth prospects.

• Strategy: Invest strategically in growth, often taking on debt or securing investors, while managing cash flow carefully.

• Example: A SaaS startup with a promising new platform might not yet be profitable but could attract investors who see its potential, using their capital to expand its user base and develop additional features.

Rough Diamond:

• Description: Low cash flow and low enterprise value—a business with untapped potential that needs refinement.

• Strategy: Pivot or adjust the business model to find a profitable niche and align with market needs, transforming into a higher-value entity.

• Example: A small regional manufacturer struggling with low margins might pivot to focus on a niche market that values customized, high-quality products, allowing it to raise prices and boost profitability.

What are your thoughts? How would you change/update/modify?

Outsourced CFO - Cashflow vs Enterprise Value https://www.teeupnextgen.com/post/outsourced-cfo-goose-rocket-prospect-diamond