One of the most important parts of selling a business is deciding how much it is worth. Having a professional valuation is the most thorough option, but it is not always necessary and can be potentially pricey. We recommend starting with another valuation method, the discounted cash flow method.
What is Discounted Cash Flow?
Discounted Cash Flow (DCF) is a valuation method that uses projections of expected future cash flows to determine the value of an investment today. DCF can be useful to determine the potential benefit of any type of investment.
Although DCF is based on assumptions and predictions, it is one of the easiest valuation methods and can be edited on an ongoing basis to have up-to-date values.
This is different from a cash flow report, which is a snapshot of the current financial health of a business and is based on current financial statements.
Why should I have a DCF?
Having a DCF in your succession plan is useful because it provides a single-number value of the potential value of your business. This number assists in validating the asking price for the business and can help potential buyers determine if the investment is worth their money.
DCFs are extremely detailed, taking into account exact numbers from things like cash flow projections and growth rate. A DCF is also more objective than other valuation methods, and can provide a buffer for a business owner’s sentimental value of their business.
The valuation provided by a DCF can be done over a long period of time, which is incredibly beneficial when discussing the purchase of a business as potential buyers would want a business with a greater potential longevity.
How do I calculate DCF for my business?
DCFs are based on predictions of future cash flow, which is determined by analyzing financials from the past three to five years. Other documents that may be needed could include income statements and profit/loss statements.
It is possible to calculate a DCF for your business on your own in an Excel spreadsheet, but there are many nuances best left to a professional.
SuccessionMatching offers a DCF for free with a membership to their website. This DCF is completed by the SuccessionMatching team based on past financials and requires business owners to fill out a brief questionnaire. In return, business owners are provided with a 13-page Excel spreadsheet, which can be updated as needed.
Discounted cash flow is a useful tool to help valuate a business, and can act as a key starting point in determining an asking price. They can be updated easily as needed, making them a valuable tool for reflecting the worth of a business as financials change.