We looked at how to forecast the revenues of a company that has a history of acquisitions. But how do we forecast the revenues of a company that has a history of acquisitions? We address this question on this page: “How are acquisition costs forecasted for a company that has a history of acquisitions?”
Many students flatline acquisition costs when forecasting cash flows for a DCF model because acquisition cash flows are uneven and sporadic making it difficult to forecast. This is fine if you are not capturing the growth via acquisitions in the top line. However, unwittingly, the same models capture the growth via acquisitions in the top line because they have used the historical growth rates to forecast revenues. This is wrong because you have captured the benefits of acquisition but not the costs involved in the acquisition.
One way to capture the cost of acquisition is to average the acquisition spend over a longer-term and forecast that spend on acquisition into the forecast period. If you are not including the cost of acquisition, please do not include the growth that comes from the acquisitions as it would be inconsistent.