Discounted Cash Flow
Discounted Cash Flow...AKA DCF
The income approach utilizing the Discounted Cash Flow Method is based on the theory that the total value of a business in the present value of its projected future earnings, plus the present value of the terminal value. This method requires that a terminal-value assumption be made. The amounts of projected earnings and the terminal value are then discounted to the present using an appropriate discount rate. Solid financial projections are necessary for this method to produce an appropriate result.
This method says there is value in the future of your business. It will use your projected financial statements to assess the future value and then use an appropriate discount rate to discount that value to present day.
Why it Matters to You
This is method of valuing a company. This is a more sophisticated approach than simply taking cash flow and multiplying it by a multiple to get the value.
You have worked hard over the years to build the foundation of your business. If you have a good growth story and plans in place to make it happen, with solid financial projections, this method makes sense to use.
This is a method we are seeing PEGs using when evaluating companies to purchase.