DCF estimates the value of a business by projecting future free cash flows and discounting them back to present value using a rate that reflects the risk of those cash flows. It is the most theoretically rigorous valuation method.
Businesses with predictable cash flows, contracted revenue, or where strategic decisions need a defensible long-term valuation. Common in PE acquisitions and major strategic deals.
— How it works
Step by step
01
Forecast free cash flows
Project revenue, EBITDA, capex, and working capital over a 3–5 year explicit forecast period.
02
Estimate terminal value
Calculate the value of cash flows beyond the forecast period using a perpetuity or exit multiple.
03
Determine the discount rate
Typically the Weighted Average Cost of Capital (WACC), reflecting the risk profile of the business.
04
Discount and sum
Discount each year’s cash flow plus the terminal value back to today, then subtract net debt to arrive at equity value.
— Strengths
Captures long-term value creation
Forces rigorous business plan thinking
Defensible in negotiation when assumptions are robust
Best method for contracted revenue businesses
— Limitations
Highly sensitive to assumptions
Small input changes produce large output swings
Requires reliable cash flow forecasts
Less useful for early-stage or volatile businesses
— Our insight
"Sensitivity analysis is essential — present a range of values across realistic discount-rate and growth-rate scenarios rather than a single point estimate."
Take the next step
Find out what your business could be worth before buyers do.
If you are considering a sale now or in the next few years, a confidential valuation call can help you understand where you stand, what buyers may look for, and what could improve your outcome.
