10 Aug Discounted Net Cash Flows: Business Valuation Considerations
The following are great examples of when the Discounted Net Cash Flow method is a good fit for valuing the business:
- Earnings/cash flow potential contributes significantly to the company’s worth.
- Current cash now levels are expected to differ significantly from future cash flows.
- The company’s future net cash flows can be reasonably estimated.
- The company’s net cash flow in the terminal year is expected to be significantly positive (that is, not negative or marginally positive).
- The company’s total net cash flow during the forecast period is not expected 10 be significantly negative.
- If Valuing a controlling interest, owners’ benefits can be reasonably estimated. (Such benefits include compensation, perquisites, personal expenses paid by company).
- The company is a start-up business.
- The company is a potential acquisition.
Discounted cash flow is perhaps the most common method used in business valuation. While many cash flows are set based on historical financials, there are ways to boost cash flow prior to divestiture.