Free cash flow (FCF) is the cash generated by a business after deducting capital expenditure required to maintain or grow operations. In M&A diligence, free cash flow is used to assess the cash conversion of EBITDA and the underlying cash-generating capacity of the business.
A business with low cash conversion (FCF substantially below EBITDA) is generally valued at a lower multiple than one with high cash conversion. Buyers may model both metrics in arriving at a valuation.