Tool # 1 - Discounted Cash Flow Valuation

What is your business worth?

The Discounted Cash Flow (DCF) Valuation tool provides an estimate of your company’s value based on its projected future cash flows. The model projects cash flows over a five-year period and assumes a terminal value determined by an exit multiple. The DCF tool relies on eight input variables:

1) Revenue: Your company's Revenue for the most recent trailing twelve-month period

2) Growth Rate: The expected annual growth rate for your company's revenue

3) EBITDA: Your company's EBITDA for the most recent trailing twelve-month period

4) Depreciation & Amortization: Your company's Depreciation & Amortization for the most recent trailing twelve-month period

5) Net Working Capital: The current Net Working Capital of your company

6) WACC: Your company's weighted average cost of capital

7) Tax Rate: Your company's effective tax rate

8) Exit Multiple: Use the expected enterprise value multiple for companies in your industry. We use 6.0x in our example

This model views your business as a cash-generating machine. It answers the question: “how much would somebody pay for that future cash stream today?” Based on the core principle of finance that a dollar tomorrow is worth less than a dollar today, the value of future cash flows must be discounted to present value. The equation used for discounting future cash flows is:

DCF = CF1/(1+r)0.5 + CF2/(1+r)1.5+ CF3/(1+r)2.5 + … + CFn/(1+r)n-0.5 + (EBITDAn x Exit Multiple)/(1+r)n

The model includes a sensitivity table that demonstrates the impact on valuation of three variables: Growth Rate, WACC, and Exit Multiple.

1) Growth Rate: Not surprisingly, the faster a company grows, the more cash it produces (assuming the cash consuming variables - Net Working Capital and Capital Investments do not outpace this growth), thus generating a higher valuation estimate.

2) WACC: WACC can be used as a proxy for business risk. The lower the risk, the more likely sustainable cash flows will be generated in the future, thus a lower discount rate. The lower the discount rate is, the higher the value of future cash flows.

3) Exit Multiple: The model assumes the terminal value is derived from a notional sale of the business in Year 5 by applying the Exit Multiple to the business and discounting the valuation back to today. The higher the Exit Multiple, the higher the valuation estimate is for the business.

It is important to acknowledge that the DCF valuation method offers an estimate aimed at determining the present value of your business.  A more complex analysis would allow you to model how the variables move independently and provide a more accurate estimate of your company’s valuation.

Ready to Determine the Value of Your Business?

Use our DCF valuation tool below to get a clearer understanding of your company's worth and what drives that value so you can plan for the future with confidence.

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